Author Archives: Stuart Burns

Reports in the media that natural gas prices in the U.K. have more than quadrupled over the last year to highs of 180p per therm from around 40p per therm this time last year are making headlines. This is largely because of the impact on small, startup gas suppliers who have been forced out of business over recent weeks.

However, natural gas — and energy prices, broadly — have been rising strongly. This has been the case, not just in the U.K. but across Europe for much of this year.

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Power prices on the rise

natural gas tap

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In part, this is weather-related. Exceptionally low winds are failing to generate sufficient renewable energy. However, the situation is also due to the rise of natural gas prices, globally and specifically in Europe.

Demand from China and severe weather in Texas have led to increasing demand and constrained supply. As such, those have created the perfect conditions for speculators to drive prices higher.

Another less talked about contributor is the failure of Russia to supply more than its minimum contractual requirements to the European market for some months. The move is widely seen as the Russian authorities trying to apply pressure on Europe for the approval of the Nord Stream 2 gas pipeline.

According to The Guardian newspaper, around half of the U.K.’s electricity is generated by natural gas-fired power plants.

The situation is exacerbated by unplanned outages of nuclear power plants this year. Furthermore, fire shut down a main power cable importing electricity from France just this month.

Natural gas surge

The U.K. relies heavily on natural gas for both residential and industrial use. The resulting rise in prices has already led to the closure of two major U.K.’s fertilizer plants.

This has had the knock-on effect of crimping CO2 production. Ir is made as a byproduct and is the source of some 80% of the UK’s supply. CO2 is needed for a wide variety of industrial and agricultural applications.

Steel impact

The U.K.’s second-biggest steel producer, British Steel, is quoted by the Financial Times as saying that the U.K.’s power prices are spiraling out of control.

The company is on variable electricity prices. British Steel has warned it could have to close production in the face of unprecedented price increases.

Electricity costs can represent up to 20% of the cost of converting basic raw materials into steel. The company is quoted as saying it is facing a maximum price at peak times of up to £2,500 per MWh.

Meanwhile, it saw an average of £50 per MWh in April.

Spot prices in excess of £1,000 per month MWh are becoming increasingly common this month after wholesale prices in the U.K. rose dramatically.

Nor is the UK well served with reserves of natural gas. It has just 1% of Europe’s total storage after failing to invest in storage facilities over the last 10 years. So, if supplies from Russia do not increase as the winter season approaches, the U.K. is probably the worst-placed of all European markets in having no alternatives to limited supply and rising prices.

While European steel producers are more protected in terms of energy prices by state rules and long-term agreements, producers in Italy are voicing worries. Rising power costs are said to be behind the current price of steel products in southern Europe, which had expected to decrease on falling scrap input costs but were being hampered by record power costs.

With winter approaching, the situation is likely to get much worse before it gets better.

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It is a curious insight into E.U. thinking when there is a clear case for anti-dumping duties only for them to be rowed back at the 11th hour after complaints from just two aluminum users and one importer.

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Chinese aluminum and European anti-dumping duties

China aluminum

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You must assume they are well connected. Pretty much the whole aluminum manufacturing sector had been behind the original case to investigate.

Currently, following an announcement made in April 2021, provisional duties of between 19.3% and 46.7% were set to become definitive duties of between 14% and 25% from October.

Those duties would have stayed in place for five years. But it seems the rapid rise in aluminum prices has sparked panic, if not in Brussels then at least among importers with the most to lose.

As such, pressure has been applied to postpone the investigation.

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A deal is not a deal until it is done, goes the old adage.

Mining projects are notorious for falling afoul due to presuming agreed terms will be played out as expected.

The Financial Times reports on the conundrum BHP and Rio Tinto face in developing the Oak Flat copper ore body in Arizona.

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Oak Flat copper project faces challenges

mine mining

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Oak Flat, 65 miles east of Phoenix, is home to a giant underground ore body. The ore body holds enough copper to satisfy 25% of U.S. demand for 40 years, the Financial Times reports.

That is a very sizeable asset to the U.S. economy and a strategic resource if ever there was one in a world of increasingly strident resource nationalism.

But Resolution Copper, a joint venture between Rio and BHP that wants to mine it, has been facing opposition from the San Carlos Apache Tribe, for whom the site is said to have special religious significance.

That is not an unusual situation in democracies the world over, with indigenous tribes whose rights are respected and enshrined in law.

Nor, it must be said, does Rio have a great track record here.

Just last year, it wilfully destroyed a 46,000-year-old sacred Aboriginal site in Australia to make way for a mine extension. For Rio, the action became a public relations disaster (not to mention an archaeological disaster). It is something that will takes years for it to overcome.

However, in this instance, the joint venture Resolution Copper, 55% owned by Rio and 45% by BHP, had an agreement signed in 2014 that would grant the miners right to develop the resource. That deal includes some 2,400 acres of national forest land including Oak Flat, in exchange for 5,400 acres of land owned elsewhere.

Land swap

The problem is, in part, that the recipients of this land swap is not the tribes, but Uncle Sam.

According to National Geographic, early this year the government receives the 5,400 acres considered of equal monetary value. However, there appears to have been no account of the area’s historical significance to local people. That land swap was contingent, the Financial Times reports, on the U.S. Forest Service completing a Final Environmental Impact Study (FEIS), which would assess the potential effects of the mine development. Again, though, it doesn’t appear to have considered the loss of the tribal lands.

The FEIS released the report and gave its approval in the final days of the Trump presidency. That approval, however, now been rescinded by the Biden administration. As such, the development is now in jeopardy as the government considers the concerns raised by tribes and the public.

Tribal, public opposition

Both tribal and public opposition remains widespread.

The underground mine is some 7,000 feet below the surface. The gradual removal of the ore body over 40 years — although mined via shafts underground, not open cast — would still result in a two-mile wide crater and the loss of water resources in the area, according to ABC15 news, As such, it could potentially devastate the local environment, opponents say.

Unfortunately, ore bodies can only be mined where they exist. There is only so much high-grade copper in the world. Compromises often must be made. Whether a solution will be found in the case of the Oak Flat copper project that will allow the massive ore body’s eventual exploitation remains to be seen.

Rio and BHP have invested $2 billion into survey work so far. They may have to invest much more before the project sees the light of day.

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Exchange-traded funds, or ETFs, are sometimes punted as an alternative to direct investments on metals exchanges, like the LME or CME.

But in reality, it is a different kind of investor who buys ETFs, even if they are largely buying into the same metal story.

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ETF investors and looking ahead

ETF

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ETF investors are often longer-term investors wanting to buy into a trend rather than take a short-term position. More retail or private investors buy ETFs, seeing themselves as investors rather than speculators (if that distinction is a fair one).

But as a recent article in the Financial Times suggests, ETF investors are facing a similar question to trade or hedge fund speculators in estimating how long this run in price rises has to go. Furthermore, they are also facing the question of whether it is part of a much longer-term supercycle or a shorter-term supply chain restocking – pandemic bounce-back recovery.

The supercycle narrative is based on the transition to a new clean energy landscape and the demand that new, low-emission technologies will generate for certain metals like cobalt, nickel, copper and aluminum.

A similar narrative is driving agricultural ETFs. Climate change will create more challenging conditions for farmers and increase the likelihood of poor harvests. In turn, that would usher in decades of higher prices for agricultural products.

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When Chinese steel group Tsingshan announced its Indonesian nickel operations would supply matte — a form of the metal used only for stainless steel production — to battery makers back in February, the news undercut the narrative that only refined nickel would be sufficiently high grade for the electric vehicle sector.

nickel price

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The price proceeded to crash. Furthermore, he Chinese government’s decision May 1 to revoke the VAT tax rebate supporting exports of stainless-steel products removed a plank of support for metal exporters in a bid to help domestic consumers.

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Nickel narrative

From a bear narrative of oversupply in the first half of this year the nickel market has swung dramatically to a bull story of rampant demand.

That demand, however, is from solid stainless steel consumption, not from last year’s expectation of battery demand.

China is largely driving the nickel price. A technical squeeze on the SHFE and strong physical demand, manifested by rising imports, are supporting the price.

A Reuters report explains how SHFE inventory had fallen to just 4,455 tons at the end of August. That marked its lowest level since the contract began in 2015.

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An aluminum market that has lived with Chinese oversupply for two decades is experiencing a very different year in 2021.

According to Reuters, it is starting to price in a very different future.

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Aluminum prices of the future

aluminum ingot

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The world needs more aluminum to go green. However, the smelters that produce the stuff use huge amounts of power. Those smelter account for around 2% of all manmade emissions each year, much of which is due to Asia’s overwhelming reliance on coal as a power source.

Squaring the circle between aluminum’s huge power demands and efforts to meet emissions commitments is proving very challenging for China’s aluminum industry. The post reports IAI estimates that the world will need another 25 million tons of primary metal production to meet an expected 80% rise in demand by 2050, fueled in large part by the drive to decarbonize.

Yet, even that daunting target assumes a 100% recycling rate. Even with the best of intentions, that is unlikely to happen.

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So far, it has been largely Samsung cell phones or laptops batteries that have caught the media’s attention when devices have caught fire, particularly in contained locations like aircraft or offices.

But a spate of reports suggest the problem could also extend to cars, where the potential for serious consequences could be even greater — both financially and for life and limb.

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GM issues Chevy Bolt recall

lithium-ion battery

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News late last week that General Motors is to recall all 2017 to 2022 Chevy Bolt EVs for battery replacements, saying the LG-supplied batteries could have not one but two serious defects with the result they are at risk of causing fires. As a result, LG’s share price plunged by 10% overnight.

GM is to replace the battery modules after two separate incidents of batteries exploding, despite earlier assurances that it was only older Bolts with U.S.-made batteries that had the problem. The recall now also includes those fitted with batteries made in South Korea.

The implications are huge for both companies.

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MetalMiner’s new technical analyst Jimmy Chiguil recently spoke at a MetalMiner workshop, explaining how tin’s meteoric rise this year (up 68% since January), should power higher if it sustains its break above its previous peak of U.S. $33,600 per metric ton set way back in 2011.

tin

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From a technical analyst perspective, previous peaks form natural resistance levels for the market. However, if prices exceed that point and the breakthrough is sustained, then it becomes a support level for further rises.

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Tin rally

Well, tin passed its previous peak. The metal has sustained its breakout, hitting $35,955 per ton and currently trading around $35,400, Reuters reported.

Chiguil’s technical analysis is firmly supported by robust fundamentals.

The tin supply chain is seriously stressed. Investors are taking their cue from the dwindling exchange and off-warrant stock levels around the world as evidence that physical demand is draining inventory from the market.

LME stocks have fallen from 2,415 metric tons in late July to just 1,730 tonnes now — of which only 1,000 tons are available, Reuters reports.

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Dial back to the sentiment earlier this year and copper would be powering through $11,000 per metric ton with today’s fundamentals. However, it has spent much of the last month bobbing around the mid $9,500 per metric ton mark (currently sub-$9,400 for cash).

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Copper supply news

copper mine

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Copper is normally sensitive to supply concerns.

So, the news that three mines are out of commission should be of significant support.

Reuters reported this week that although a walk-out at the world’s largest mine, Chile’s Escondida, was averted at the 11th hour this month, strikes began at the Caserones and Andina mines last week.

Union leaders at Caserones didn’t even wait for the full 10-day mediation period to end before walking off the job, Reuters reported. The mine produced 127,000 metric tons of copper last year.

Meanwhile, Codelco’s Andina mine is currently operating at a reduced rate after the start of strike action last Thursday. Andina produced 184,000 tons of copper in 2020.

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You wouldn’t believe the oil price had been quietly falling since early July when you went to fill up your tank this summer.

Gasoline demand is nearly back to pre-pandemic levels from 2019. As a result, pressure on refiners has been so marked that prices have risen sharply enough to make the Biden administration urge Russia and Saudi Arabia to pump more oil to ease a perceived tightness.

But the reality is the tightness is in refined products — not crude oil. OPEC+ is unlikely to ramp up output to appease the U.S. — or anyone else, for that matter.

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Mixed output story

Brent crude oil price chart

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Last month, after intense negotiations with the UAE, OPEC+ agreed to boost output by 400,000 barrels per day each month from August. The move was intended to bring the group’s output back to its pre-pandemic level by the end of 2022.

Even so, oil prices have dipped this month, in large part over fears regarding the spread of the more contagious Delta variant of the coronavirus and resulting slow growth around the world, particularly in Asia where vaccination rates are generally low.

The story is mixed, though, by region.

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