Author Archives: Stuart Burns

Falling aluminum prices over the last month have given rise to some asking if aluminum is now on a prolonged downward trend.

Tempting as it is to look at day-to-day movements, a more holistic analysis suggests otherwise.

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As a recent Reuters article suggests, April saw the Rusal-related sanctions effect lift prices dramatically. The supply market went into shock at the prospect of 6% of the Western world’s capacity being denied to the market by U.S. sanctions on Oleg Deripaska, blocking consumption of Rusal aluminum primary metal.

The resulting scramble for supply caused massive price inflation for those that could get metal. Some processors caught out to the point of reduced supply for the late second and early third quarters. A backtrack by the U.S. eased concerns and action by Deripaska to exit or relinquish control of En+, Rusal’s largest shareholder, have further eased concern.

Gradually, the price has unwound and at current levels is a whisker over its low point in April.

Source: LME

Aluminum’s slide is part of a wider base metals retreat in the face of a stronger dollar, plus macro concerns about trade wars and a cooling Chinese economy.

One metric that commentators sometimes consider at a basic level is inventory levels. Falling global or exchange inventory is indicative of demand exceeding supply.

With aluminum, that has not always been as clear, since more metal is held off exchange by the stock and finance trade than is held on the major LME, CME and SHFE markets.

In the early part of the decade, some analysts simply ignored these numbers on the basis they couldn’t estimate with any degree of accuracy what was happening to these shadow stocks, and believing they were locked up for the long term (making their presence almost irrelevant). This publication never took that view and has always tried to bring an estimate of off-exchange market inventory movements into our estimates.

At its peak, these massive stocks approached 10 million tons, while LME stocks hit a peak of some 4.5 millions tons. However, since 2016 both have fallen quite rapidly, such that today CRU estimates off-warrant stock at some 6 million tons and the LME, when metal awaiting load-out is stripped out, falls below 1 million tons, according to Reuters.

Nothing illustrates the deficit condition of the aluminum industry outside of China more powerfully than those figures.

Over 1.5 million tons per annum has been absorbed on average into the market over the last three years — and the rate has been rising.

As the remaining metal is held by fewer parties, distortions are beginning to appear in market pinch points, specific pricing points used by the LME market to roll over positions, such as the third Wednesday of the month.

Source: Reuters

This graph from Reuters illustrates the spike in spot or cash prices over three months, a condition called backwardation that is illustrative of a market under stress.

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The frequency the market slips into backwardation has been increasing, with three spikes this year alone. A market in deficit is unlikely to exhibit bear pricing for long, current apparent weakness is more a factor of short-term dollar strength and anxiety over trade conflicts.

A London Metal Exchange press release this week announced the exchange’s introduction of a new pricing option on its electronic trading platform, LMEselect.

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Following feedback from the LME’s 2017 consultation exercise, the exchange has extended the implied pricing mechanism already in operation on the LMEprecious market to be available across copper, aluminum, zinc, lead, nickel and tin base metals.

Implied pricing would extrapolate prices for contracts that mature on the third Wednesday of each month from trading activity on its most heavily traded liquid three-month date by generating an artificial price from bids on the three-month date and carry trades connected to the third Wednesday date, Reuters reports.

The exact workings of the contract are probably of less importance to the user than the objective behind it and the opportunity it brings.

The idea is the new contract will allow investors to trade on one prompt date each month rather than the greater variety currently available of any day in the month. The contract would therefore be simpler to trade and similar to the system used by the CME.

Chief Executive Matthew Chamberlain was quoted by Reuters as saying: “We expect this additional option will appeal to those smaller fundamental financial investors not currently accessing our market who will now have the opportunity to see and trade quoted prices on the screen.”

Indeed, it may appeal to a wider range of investors, but we hope it may also assist the large number of smaller metal trade consumers and processors who currently struggle to access hedging opportunities due to their smaller volumes.

Being simpler to administer, the implied pricing product will, it is hoped, be cheaper to operate and available to smaller players (a drawback of the current LME system that MetalMiner raised with the exchange back in 2017 during the consultation process).

The new contract launches from July 30. While buy-sell spreads may be marginally wider with implied prices, that will not worry smaller consumers anxious to access the exchange’s hedging opportunities.

Benchmark your current cold rolled coil sheet prices and see how it compares to the market

It remains to be seen once the price launches how quickly volume ramps up, but early indications suggest it should prove popular.

Never let it be said that metals markets are not dynamic (and I am not talking about metals prices).

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After the financial crisis, the one area of the market that was making money was the stock and trade financiers, plus the warehouse companies on whom they depended for safe storage. In 2010, Goldman Sachs bought Metro for some $450 million and proceeded to cream the market as inventory swelled to record levels. Stuck behind massive load-out queues, warehouse companies pulled in guaranteed rents.

But following implementation of strict LILO and queue-based rent capping (QBRC) rules by the LME, queues ran down and, maybe coincidentally (do you believe that?), the grey market stock and finance firms exited the LME warehouse system in droves.

According to FastMarkets, total stocks in LME-listed warehouses are currently just above 2.5 million metric tons, down from their peak of 7.6 million tons back in July 2013 (before the warehousing reforms were bought in). In Europe, the total area allocated for LME metals storage sheds dropped by 18% from June 2017 to 2018, down to 1,747,114 square meters. Previously, Glencore dominated Vlissingen, more than half of warehousing space has gone in the past year.

The situation is arguably even more brutal in Asia.

Busan in South Korea, plus Malaysia and Singapore — locations that all expanded rapidly a few years ago — have seen volumes collapse.

In Singapore — home to most LME aluminum metals in Asia, according to FastMarkets — live aluminum stocks have plunged by half to 91,725 tons over the last year, while Busan has seen a 71.8% drop in aluminum from a year ago and a 66.6% drop in copper.

It could be tempting to brand firms exiting the market to rats abandoning a sinking ship — but who can blame them?

With falling volumes, it is proving tough to turn a profit.

Noble sold out to Australian and Singapore investors in early 2017 and its Worldwide Warehouse Solutions (WWS) has now gone bankrupt, while Katoen Natie of Singapore has closed its LME operations in Asia following irregularities. Henry Bath, a firm that has seen markets rise, fall and rise again over more than 200 years of trading, and will likely ride out these trials, has taken over their sheds.

Warehouse companies put the swift decline in margins down to a fall in volumes and the exodus of the stock and finance trade. LME stocks of aluminum at 1.145 million tons have returned to where they were before the financial crisis.

According to CRU data quoted by Reuters, shadow stocks held off warrant but often in the same warehouses as LME stocks have fallen from 10 million tons at the start of 2016 to just over 6 million tons at the end of Q2, and are still falling. That is a massive loss of revenue for storage firms and in part explains why the big names, both in warehousing and finance, saw the writing on the wall and got out in recent years.

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So, this is an industry that is maybe not in crisis, but is certainly facing challenges and radical change.

Who would have thought wind’s transformation from subsidy-supported to self-financing power source would happen so quickly – not this publication, that’s for sure.

Apart from diehard environmentalists, most consumers have been opposed to renewables on the basis they cost significantly more and turbines are an eyesore on the landscape.

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But in the span of less than 10 years, public opposition has declined. Opposition has not gone away entirely, but it has softened as we have become more familiar with the sight of slowly rotating turbine blades on the horizon and with the realization that its costs are falling dramatically.

A recent article in The Telegraph reports on how the cost of power production from onshore wind farms has dropped so far it undercuts conventional coal, natural gas and nuclear options.

The below graph from 2015 shows onshore wind as the cheapest option; costs have come down further since then.

Source: Wikipedia

Calling it the “subsidy-free revolution,” the Telegraph article reflects our own surprise at how quickly the change has taken place.

To be fair, offshore power still requires some subsidy because of the greater cost of installation and maintenance. Even here, costs continue to fall and subsidy is a route the authorities prefer to entertain because of public opposition to what was seen as the blight of onshore turbines dotting the landscape.

In large part, this is because turbine sizes have increased and, as a result, efficiencies have increased.

Source: The Telegraph

The industry is seeing it as a major investment opportunity, generating jobs while at the same time reducing the country’s overall carbon emissions.

A figure of £20 billion covering both onshore wind and solar over the next 10 years is mooted, all of which would be subsidy-free.

The latest figures are sounding the death knell for nuclear power in the U.K., but as usual the government hasn’t caught up with the numbers.

Nuclear power is costing a massive £92.50 per megawatt hour and is partly justified on the basis that a base load of power is always required to fill in renewables variability.

However, battery parks like Glassenbury in Kent are springing up that can meet gaps in demand, but nothing like a 2 GW nuclear power plant; still, a few MW here and there is slowly adding up.

But, like renewables, costs will need to come down for investment to flow into battery parks. That is, they’ll need to come down to the extent required to negate the need for quick fireup of conventional power sources to fill in gaps during cold snaps or, as renewables rise, as a percentage of the whole to fill in for periods of low wind or at night for solar.

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Still, a low-carbon future, at lower power costs and with the benefit of economic growth from investments – what’s not to like?

The collapse of iron ore prices in the face of oversupply has been threatened for the last few years.

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Following massive investments in Australia and Brazil, oversupply was expected to hit dwindling demand on the back of a cooling Chinese property market and an environmental crackdown on excess steel production.

Yet despite repeated dire warnings, prices have, if anything, gone the other way, rising to over $67 per ton during May and only falling back during the following month.

Finally, it seems gravity is reasserting itself and prices are beginning to ease.

While oversupply has not manifested itself as a flood, producers have shown remarkable market discipline, and it has meant ample margins remove one barrier to producers following the market down.

In part, Chinese efforts to reduce excess capacity have supported steel prices by supporting finished steel prices and, hence, steel producers’ margins, rather than impact iron ore demand. A focus on pollution has boosted demand for higher-grade iron ore, supporting prices for the highest purity Australian and Brazilian grades and reducing demand for lower-grade material produced in India, Africa and Iran.

According to Reuters, constraints on steel producers have tightened the domestic steel market and demands that steel companies and coke producers meet ultra-low emissions targets has further supported prices for top-grade material.

Spot ore with 62% content delivered to north China was at $63.85 a ton, according to But prices have lost ground of late, with further expectations for an easing in prices by the end of the year coming amid signals China is cooling off.

Fears over the effects of a trade war with America have not only hit the stock market.

A combination of cooling demand as debt tightens and new supply in Brazil and Australia has to find a home and will, it is believed, drive down prices for both steel products and iron ore. Iron ore may get dragged lower in the second half as global mine supply expands, steel prices ease off, and renewed production curbs at mills in China blunt overall demand.

Prices may drop to $60/mt in the next quarter and $55 in the fourth, according to Sun Feng, senior ferrous metals analyst at Orient Futures Co, who has more than a decade of experience tracking the market, as quoted in the Gulf Times.

CRU Group also sees a slight fall, with prices bottoming just below $60 in October or November.

“The outlook of iron ore prices is not rosy, particularly in the fourth quarter,” Sun was quoted as saying.

The death of iron ore has been predicted many times over the last few years. However, a combination of higher-than-expected demand and market discipline by suppliers has kept prices relatively buoyant.

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Nonetheless, it does seem as if the stars are aligned now for a fall.

This is not the first time critics have lined up to suggest Glencore is on the ropes, but close to the wind as the trader often sails, the firm will likely find solutions to its current challenges, substantial as they are.

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And let’s not belittle the challenges the firm is facing. The U.S. Department of Justice, no less, is investigating the company’s business dealings in the Democratic Republic of the Congo, Venezuela and Nigeria as part of a corruption probe, Reuters reports.

If wrongdoing is proven, then Glencore and its executives could face huge fines or even criminal prosecution under the Foreign Corrupt Practices Act the U.S. is pursuing.

Some have speculated that the DoJ’s action was triggered by Glencore’s announcement that it would settle a case for mining debts with Dan Gertler — a mining billionaire on a U.S. sanctions list — in Euros to avoid the sanctions, which forbid payments in dollars. It is suggested the authorities would have taken a dim view of circumventing the sanctions by switching currencies, even though Glencore claims it had taken advice from the appropriate authorities.

Source: Financial Times

Not surprisingly, the share price reacted negatively to the news, dropping 12% and suffering its worst day in over two years following this week’s announcement of the U.S. subpoena.

The share price is down about 18% this year and was hovering near one-year lows as the company’s share price continues to underperform its peers, despite producing healthy profits and slashing its debts. The company reacted by announcing a $1 billion share buyback. Some critics saw that as an act of hubris, but the announcement helped the share price recover (at least in the short term).

In the longer term, investors will want to see a lower risk profile, but in life you can rarely have your cake and eat it too. Much of Glencore’s success and phenomenal growth has been down to successfully managing a high-risk profile, operating in unstable parts of the world and dealing with less scrupulous regimes in the process. That doesn’t make Glencore unscrupulous themselves, but it does open them up to the attention of authorities keen to ensure such a major corporation is behaving responsibly.

Suggestions that this investigation is the beginning of the end of Glencore are far overdone, but the investigation will prove lengthy, absorbing of management time and has the potential to unearth connections and dealings that the firm may not even be aware of (guilty by association, if you like).

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Still, Glencore has been here before and will no doubt weather this storm as it has previous ones.

Stock markets in New York, London and Shanghai have been sliding for a month now since President Donald Trump unleashed a trade war on the U.S.’s trading partners in an effort to reset terms seen as unfair by Washington.

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Normally, as stock markets slide and tensions rise, you would expect to see the gold price rise; the precious metal is considered a safe-haven asset because it retains or increases value during market turbulence.

Gold is often sought after by investors through economic uncertainty in order to limit their exposure to losses in other assets. Yet, currently gold is at or near a seven-month low, according to Reuters. According to the Singapore Business Times, for the first time in two years, Schroders has cut its global growth forecast for 2018 and 2019, citing rising oil prices and the uncertainty over trade relations that could drag on business decisions to hire and invest (particularly for exporters).

Source: TradingView

So, why isn’t gold playing ball?

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There will be significant winners and losers to the current U.S.-E.U. trade war, but none more so than in the automotive sector.

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Size matters when it comes to reshuffling production among plants to avoid import tariffs. According to the Financial Times, larger companies like Toyota, Volkswagen, and the Renault–Nissan–Mitsubishi Alliance (RNM), all of which make roughly 10 million vehicles a year, have the capacity to move production between plants.

Toyota is probably the best placed, with two-thirds of its cars sold in each region already made within the borders of that region. The VW group, with 122 factories around the world, has considerable flexibility and, like Toyota, has been a pioneer in flexible manufacturing systems that allow it to make a range of vehicles at each site.

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Steel giants Tata Steel and thyssenkrupp have been talking about it since 2016, but now they have finally managed to reach an agreement to merge their European operations into a 50-50 joint-venture, according to the BBC.

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The merged business, to be called thyssenkrupp Tata Steel, will have annual sales of about £13 billion (U.S. $17 billion) and be able to produce 21 million tons of steel per year. The delays in reaching an agreement have in part been due to intense union lobbying to protect the two companies’ 48,000 workers.

The agreement is said to protect jobs with no compulsory redundancies for the next eight years, according to The Telegraph. While no compulsory redundancies have been agreed upon, the tie-up is expected to lead to about 4,000 voluntary redundancies as overlaps are eliminated between the three main hubs of the combined group – IJmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales — with the head office based in the Netherlands.

It is hoped the merged group will make cost savings of between £350-£440 million a year (approximately U.S. $520 million), although unions have secured an agreement for the first £200 million of operating profits to be reinvested back into the business. thyssenkrupp Tata Steel will be the second-largest steel producer in Europe after ArcelorMittal and it is hoped its size will help it compete against rising competition from Chinese imports (made worse by President Donald Trump’s recent imposition of a 25% import tariff on steel made in the European Union).

Heinrich Hiesinger, thyssenkrupp CEO, is quoted by the BBC as saying even prior to the U.S. import duty the two companies needed to consolidate and become more efficient because of increasing pressure from imports and an overcapacity within the industry. The loss of the two companies’ largest export market just makes matters worse.

The consequences for the combined group’s profitability in the event of Brexit have not, at least publicly, been discussed, probably because no one knows what the impact will be on moving products and people across borders post-Brexit. The only comment from the company came from Tata Steel UK CEO Bimlendra Jha who said it would be a “sorry state of affairs” when asked what a hard Brexit would mean.

Importantly, it gives the two companies an increased scale and opportunity to achieve some economies as a result.

Steel prices have picked up this year. Generally, Europe’s steelmakers are doing better, but they face considerable uncertainty as to the impact and duration of the current U.S.-European trade conflict, the level of increased Chinese imports and the possible impact of Brexit.

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All in all, the merger may prove timely; the challenges ahead are many.

The president’s assertion that trade wars are easy to win is — at this stage, at least — looking a little less certain than it was at the outset.

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Not surprisingly, exporters to the U.S. impacted by actual and proposed import tariffs are threatening to retaliate with tariffs of their own.

The Financial Times reports comments from global automakers warning that plans to impose tariffs on auto imports could raise prices of imported vehicles by as much as $6,000 per car and raise the cost of locally made cars, most of which include some foreign content.

The most alarmist comments are, not surprisingly, from the Alliance of Automobile Manufacturers, which is quoted as saying that buyers of imported vehicles would face an average $5,800 price rise from a 25% tariff.

“Nationwide, this tariff would hit American consumers with a tax of nearly $45bn, based on 2017 auto sales. Not included in this figure are costs from tariffs on auto components,” the industry group said.

In reality, such a significant price increase on imported cars would push the market in favor of domestic manufacturers. So, 2017 auto sales are probably not an exact benchmark; however, even the cost of the Honda Odyssey produced in the U.S. would rise by $1,500-$2,000 because of its imported content, the Financial Times reports.

Should, as seems likely, overseas markets impose retaliatory tariffs, this could have a significantly negative impact on U.S. auto exports, which totaled $99 billion last year.

Not surprisingly, figures vary widely as to the likely impact on U.S. vehicle production and the potential for loss of American jobs.

The Alliance of Automobile Manufacturers, citing data from the Peterson Institute, suggests a 25% tariff on imported vehicles and components would result in a 1.5% decline in U.S. vehicle production and a loss of 195,000 American jobs over a period of one to three years; if other countries retaliate, job losses could increase to 624,000.

Economists at Oxford Economics, on that other hand, said new U.S. auto tariffs would have a modest direct impact on the economy, suggesting a 0.1% reduction in GDP in 2019 and 0.2% in 2020, representing 100,000 job losses in the first year.

Either way, outside of political circles there seem to be few suggesting it will be good for jobs or auto production in the short to medium term. Should tariffs remain in place in the medium to long term, they would almost certainly boost prospects for domestic automakers and hasten the realignment of supply chains to domestic component suppliers.

So far, of course, it is unclear if the president really intends tariffs to be a long-term feature or rather a tactic he has deployed as part of a negotiating strategy to force changes in the terms of trade with America’s partners. Should the strategy be successful, it’s possible some tariffs will never be applied or could be rescinded within a matter of months. Businesses, of course, can only afford to sit and wait so long before they have to take action after the point at which tariffs are actually applied.

After the president’s unprecedented tariffs on steel and aluminum, few are doubting his resolve. Component suppliers throughout the supply chain are no doubt busy evaluating the implications for their business.

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Tariffs or no tariffs, that process alone will encourage the reshoring of component supplies over the coming years.

Supply chain vulnerability has taken on a whole new urgency.