Author Archives: Stuart Burns
oil price chart

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The oil majors are not having a great pandemic.

Consumers reacted to earlier lockdowns and continued pandemic restrictions, leading to a massive drop in demand. On the other hand, prices initially collapsed after Saudi Arabia led an assault on the U.S. shale market and engaged in a spat with Russia over prices.

Set that against an acceleration in the longer-term trend away from fossil fuels in favor of renewables. Oil companies are facing a perfect storm of low prices, low demand and long-term questions about the viability of their product. Those realities will inevitably push up the cost of capital.

As readers of the MetalMiner Annual Outlook report know, oil prices constitute one of three macroeconomic price drivers embedded in our metals price analysis.

Oil majors struggle

Two of the largest oil majors, Chevron and Exxon, have between them lost $9.4 billion in the second quarter alone.

“The demand destruction in the second quarter was unprecedented in the history of modern oil markets. To put it in context, absolute demand fell to levels we haven’t seen in nearly 20 years,” the Financial Times quoted Neil Chapman, Exxon senior vice-president, as telling analysts. “We’ve never seen a decline with this magnitude or pace before, even relative to the historic periods of demand volatility following the global financial crisis and as far back as the 1970s oil and energy crisis.”

Oil companies’ share prices reflect their fall from grace. They were once the largest sector in the S&P 500. However, now they make up just 3%. Furthermore, Exxon fell from the Dow Jones Industrial Average after almost a century.

As if this were not bad enough the oil and gas industry, indeed the whole fossil fuel industry is facing long-term decline. Economies, at varied paces, are moving toward a lower-carbon future.

Greener future

A significant feature of stimulus measures around the world is a heavy bias toward so-called green energy and/or carbon emission reduction.

Goldman Sachs estimates investment in decarbonizing the energy industry alone — renewables, carbon capture, hydrogen, and the upgrading of power infrastructure — will reach $16 trillion over the next 10 years.

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aluminum ingot stacked for export

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Just the rumor that producers in the United Arab Emirates and Bahrain could win a Section 232 aluminum tariff exemption was enough to ease prices for U.S. consumers.

The Trump administration imposed the 10% tariff under Section 232 back in March 2018. Now, however, the removal ostensibly comes as a reward for the two Arab states establishing formal ties with Israel.

The benchmark U.S. Midwest physical delivery premium collapsed from $335 per ton in mid-September to $263 per metric ton on the back of the rumor, according to Reuters.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Section 232 tariff exemption for major producers

Both countries are significant aluminum producers and suppliers to the U.S. market.

Bahrain’s Alba mill produced more than 1.36 million tons of aluminum last year. The mill supplied 11%, or 150,000 metric tons of its output (mainly billets) to the U.S. market.

Of its sales last year, 44% were value-added products (or VAPs, as they are termed in the trade). Those products include rolling slab, billet, primary foundry alloy and wire rod.

Primary mills try to boost their output of VAPs over standard ingot because they earn higher returns, over and above the cost of manufacture. For their customers, VAPs avoid the need to remelt ingot and cast into those forms before they can consume the primary mill’s products, saving energy and, hence, costs.

Emirates Global Aluminium (EGA) sold a total of 2.60 million tons of cast metal in 2019, of which 87.4% was VAPs, according to Reuters. Although they declined to be specific, their U.S. value-add exports have been estimated at about 550,000 tons last year.

U.A.E., Bahrain producers could gain market share

The fall in the MW premium is good news for consumers. However, U.S. producers will not view it as positively, as they are already facing a significant resumption of Canadian imports.

Usually, when government grants an exemption — as Canadian producers enjoy — it will impose a quota to prevent a flood of metal from the newly tariff-exempted supplier.

That will likely be the case for EGA and Alba. As such, the sharp drop in the MW premium is reflecting an expectation that the two substantial producers will be in a position to use their newfound competitiveness to take market share.

If, for example, EGA has a quota set at last year’s 550,000 tons, it could export 750,000 tons and pay the 10% duty on the excess amount. As a result, it would effectively incur only a 2.7% duty overall.

If the mill felt long-term positioning would be helped by greater market share, the tradeoff may be considered acceptable.

What’s next for domestic mills?

Domestic mills, whether aluminum or steel, generally position themselves at or around the import price when the government imposes tariffs.

Generally, however, they do not seem to add more capacity to take long-term advantage of the extra margin the tariff provides. Why? Possibly because they do not expect the tariffs to exceed more than one or, at most, two cycles of administration.

They only lasted a little over a year and a half under the Bush administration from 2002 to 2003. While they have lasted two and half years under Trump, their efficacy at stimulating a resurgence of domestic production has been limited.

Last year Canada remained the U.S.’s largest external aluminum supplier in all forms, with China coming in second.

Chinese supply, however, has been falling rapidly with tariffs and duty action over recent years. As a result, the actions of third-placed U.A.E. and sixth-placed Bahrain have become progressively more important in influencing market prices. It is a role in which it looks like they just got helped to have even more impact.

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No, we don’t mean that much-vaunted but still distant dream of India becoming a second China economically — the disparity expands rather than contracts with time — but rather could India become a pariah state after China in terms of feeling the pain of anti-dumping duties, quotas, and tariffs (particularly with respect to Indian metal exports)?

It has already happened in Europe on stainless steel long product. The E.U. has imposed an annual quota and punitive 25% tariffs for every kilogram over that limit in a bid to protect its domestic producers.

Are you under pressure to generate aluminum cost savings? Make sure you are following these five best practices!

With rise to No. 2, could Indian metal exports be next to face tariffs?

Last year, India ranked the second-largest steel producer in the world behind China. (However, India’s production totaled not much more than a tenth of China’s output.)

India is becoming a global force in many ferrous and non-ferrous metals.

Originally, the rationale was India’s huge population and low per-capita consumption of metals suggested growth prospects on a Chinese scale.

Such potential has led to considerable investment. A good level of domestic resource — iron ore in particular — has meant economies of scale have favored domestic growth prospects.

But slow GDP growth, a bureaucratic business environment and tortuous legal environment over land ownership have slowed what should otherwise have been a meteoric rise.

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The widely, if not universally, held belief that globalization is a win-win panacea for growth has never looked shakier.

While President Donald Trump has led the charge on calling out the failings of unfettered engagement with China and all that entails in terms of loss of manufacturing capability and sharing of hard-won technology, he is by no means alone.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Globalization and China

There is a growing groundswell of opinion that the long-held liberal beliefs that engagement would change China’s behavior have proved flawed.

China today is arguably more centrist, more actively and belligerently nationalistic and worryingly less influenced by world opinion than it has been for decades.

And yet it has, from an economic point of view, proved remarkably successful so far.

China’s economy has bounced back faster than those in the West. Furthermore, its economy has recovered faster than even its close Asian neighbors. That is because, in part, the party’s control meant it could enforce harsh — compared to in the U.S. or Europe — lockdown measures in the face of the pandemic. That enforcement extends to continued adherence to social distancing and hygiene standards since.

It is unlikely that a change of president in January, were that to happen following the November election, would have a meaningful impact on U.S.-China relations. A Biden presidency may try to foster a more collaborative international approach. However, the direction would likely be similar.

Europe, too, is following a less bellicose but similar path.

Europe’s investments in China and reliance on China as a trading partner are greater than that of the U.S., for whom China trade still represents a modest percentage of GDP.

Yet, even in Europe, there is increasing talk of decoupling supply chains and restrictions of technology transfers to China. Furthermore, these is talk of restricting Chinese technology companies’ access to the European market.

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Europe’s steel industry appears to be at a crossroads.

Hurting before the coronavirus pandemic-induced lockdowns, the industry struggled with overcapacity, high costs, weak demand and competition from lower-cost sources (like China and Russia).

The lockdowns decimated demand. Major consumers, like the automotive sector, which takes something like 20% of European production of flat-rolled steel, according to the Financial Times, have now largely reopened.

Even so, auto sales are not expected to recover to pre-pandemic levels until 2025, according to major European component supplier Continental.

Volatility is the name of the game. Do you have a steel buying strategy that can handle the ups and downs?

Could M&A be the answer for European steelmakers?

Mergers and consolidation have traditionally been posed as solutions. Bigger is better and economies of scale will solve the challenge of profitability, the argument goes.

However, many are arguing European steelmakers should worry less about consolidation and more about rationalization.

Furthermore, politicians are among those reluctant to consider job losses in their own regions.

The steel industry employs some 330,000 people across the continent. About 40% of the workforce is currently on some form of short working or under threat of redundancies.

However, if the government does not support closures with retraining and regional enterprise policies to support alternative employment opportunities, the European steel industry will limp on with, at best, marginal profitability and poor capacity utilization.

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It is not often the world’s largest carmakers engage in mergers and acquisitions among themselves.

Fiat Chrysler and Renault Nissan announced a $35 billion plan to merge back in May 2019. The merger would have created the third-biggest carmaker, behind Volkswagen and Toyota.

But within 10 days of the announcement, FCA pulled out and it came to nothing.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Take two: Fiat Chrysler, PSA to merge

Now, still keen for a tie-up, FCA has announced it will merge with the French group PSA.

PSA is the owner of brands like Peugeot, Citroen, Vauxhall, and DS. The deal, valued at $50 billion, would form a 50/50 partnership with a turnover of some €170 billion ($200 billion) a year and annual production of some 8.7 million units.

As such, the deal would put them, again, third. By other measures, they would be fourth, behind at least Volkswagen and Toyota, and possibly the Renault–Nissan–Mitsubishi Alliance (if you consider that one entity).

The combined FCA-PSA company will be renamed Stellantis. The name comes from the Latin “stello,” meaning “to brighten the stars.” (Yes, I know, who thinks up these names?)

According to AutoExpress, based on 2018 figures, Stellantis will have approximately 46% of its revenues from Europe and 43% from North America. PSA has long held ambitions to expand into North America. As such, a merger with FCA would make that much easier.

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We may be coming out of the first pandemic lockdown and business does, broadly, appear to be picking up; however, but some sections of manufacturing, including U.K. car manufacturing, are still suffering badly.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

U.K. car industry, supply chain face challenges

An article in the Financial Times starkly outlines the continued pain the U.K. car industry is experiencing and, by extension its extended supply chain.

U.K. car manufacturing fell 44% last month compared with a year earlier. Domestic orders and exports remain severely depressed. Last month’s performance marked the sector’s second-worst since car plants restarted after lockdown.

The Financial Times went on to advise that just 51,039 cars rolled off British production lines. The total fell from 92,153 in August 2019. Meanwhile, August output for U.K. buyers fell 58% to just 7,795 vehicles. The number of cars made for export fell 41% to 73,443 cars.

To be fair, several plants working during summer 2019 boosted August 2019 performance. Summer output followed a three-week closedown in the spring to prepare for the expected Brexit in 2019, which in the end did not transpire.

So, looking at the first half of each year gives a fairer comparison. Yet, even in that view the decline remains dramatic.

Between January and August, the U.K. produced 40.2% fewer cars than in the same months a year earlier. The period included several weeks of complete stoppages during the first lockdown in March and April.

Year-to-date production is now down by 348,821 units worth more than £9.5 billion to U.K. carmakers, according to the Society of Motor Manufacturers and Traders (SMMT). Furthermore, projections suggest U.K. car manufacturers are now on track to produce just below 885,000 cars this year – down 34% on 2019.

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We have written in previous posts about volatility this year in the logistics market adding to buyers’ delivery and import cost uncertainty.

At other times, we have also written about the decoupling of U.S.-China trade or supply chains.

Events in recent months, however, suggest the two combined are likely to continue to create significant cost and uncertainty for buyers through the balance of this year — and likely well into 2021.

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The U.S.-China trade relationship and rising import costs

Firstly, the aforementioned decoupling is just not happening.

A fair part of the current pressure on shipping space and costs is coming from increases in trade between Asia and the U.S.

The pandemic has spurred demand for Chinese-made goods from electricals like laptops and associated electronics to PPE equipment, including masks and gloves.

China now accounts for more than 85% of all U.S. imports in the category dominated by N-95 respirators, disposable and non-disposable face masks, surgical drapes and surgical towels, according to Forbes. The U.S.’s imports of those products have surged to multiples of previous years’ demand.

From disaster to boon

Secondly, the normal run-up to the Christmas period is hitting a brick wall.

Shipping lines are removing sailings. Initially, the measure constituted a coping mechanism during spring lockdowns. However, since then, as the success in raising freight rates became apparent, the measure became a blatant move to improve profitability.

The pandemic has evolved rapidly from being a disaster for the major shipping lines to becoming a boon.

The disruption has caused considerable challenges, including:

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OPEC+’s production cuts have been pretty successful at steadying the oil price this year.

First, the cuts steadied the market. Furthermore, rising prices came in the face of oversupply and a pandemic-induced collapse in demand.

However, the alliance of producers remains far from a solid coalition.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021.

Attempts to support the oil price

Elements of game theory have long plagued OPEC’s attempts to control oil prices.

The incentive to cheat is huge. The sense by many smaller players that they suffer from output agreements more than the “big boys” breeds a sense of resentment at times.

That is particularly true among parties that have little else in common other than a desire to maximize oil revenues.

So, the Saudi oil minister’s thinly veiled dressing down of OPEC partners UAE, Nigeria and Iraq for overproducing is met with protestations but little in the way of immediate compliance.

OPEC’s production cuts have tapered from 9.7 million barrels per day in May to 7.7 million barrels per day now.

Overproduction by some players has contributed to a failure to lift Brent Crude prices past U.S. $46 per barrel. Even the current U.S. $42 level is looking vulnerable.

For example, the UAE fell in the region of 520,000 barrels over its quota last month, the Financial Times reported.

Saudi losing patience with fellow oil producers

Saudi Arabia may be losing patience with its less disciplined partners.

The kingdom is reportedly cutting its benchmark Arab Light crude more than expected. In addition, Saudi Arabia is lowering the grade to a discount for the first time since June for buyers in Asia. As such, it marks the second-consecutive month of cuts for barrels to Asia, World Oil reported.

Aramco will also trim pricing for lighter barrels to northwest Europe and the Mediterranean region.

Other Middle Eastern suppliers — including Iraq and the UAE, the second- and third-largest producers in OPEC — are expected to follow suit.

High stocks, low demand depress oil price

Refined petroleum stocks, particularly diesel stocks, are high, according to

Furthermore, demand remains weak.

Supply is being met by drawdown on high refined stocks and not feeding through to crude demand with little on the horizon likely to change that anytime soon.

Nevertheless, Goldman Sachs remains positive. The investment banker sees Brent crude rising to $49 per barrel before the end of the year.

“We estimate that the oil market remains in deficit with speculative positioning now at too low levels,” OilPrice quoted Goldman Sachs as saying to clients.

It is hard to see the price pushing much through that level before the end of this year. The oil price last reached that point at the beginning of March 2020.

Such a rise would require market conditions to be heading back to where they were this time last year, when the oil price traded at in the U.S. $60-65 range.

Much will depend on U.S. demand during the winter months. Sentiment will no doubt be supported by falling virus infection rates.

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FurAccording to the Indian Financial Express, the country is intending to take a leaf out of the European Union’s book and introducing an import surveillance scheme for aluminum and copper imports.

Does your company have an aluminum buying strategy based on current aluminum price trends?

India’s rising copper, aluminum imports

Like the E.U.’s scheme, the scheme will require importers to first register and then report imports. That way, the authorities can track the source and volume of imports.

Specifically, the government is focused on imports from China and other southeast Asian markets, the article notes.

Only by accumulating hard data can the country develop sensible policies, promoters of the scheme argue.

As such, China, Japan, Malaysia, Vietnam, and Thailand are among the major exporters of copper. Those countries accounted for 45% of India’s $5 billion in copper imports for 2019-2020, the article reports.

Meanwhile, aluminum imports amounted to nearly as much at $4.4 billion worth in 2019-2020. Of those imports, some 58% has been in the form of scrap this year.

China checked in as the biggest supplier, shipping aluminum worth just over $1 billion. Furthermore, the country has been a major supplier of semi-finished products, sometimes competing directly with India’s substantial domestic producers.

“China is a huge threat to India’s aluminium industry,” said B.K. Bhatia, joint secretary general at Federation of Indian Mineral Industries (FIMI), the country’s biggest mining lobby.

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