Author Archives: Stuart Burns

The short-term fundamentals for aluminum do not look promising, if Alcoa’s latest report is to be believed.

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The major primary producer is struggling to create positive net cash flow, a measure of the firm’s ability to pay down its substantial debt, reporting a negative free cash flow of U.S. $7 million on its $2.7 billion second-quarter revenue. The firm posted a net loss of $402 million, or $2.17 per share, although it should be added this included a $319 million one-off cost to divest its interest in the Ma’aden Rolling Company (MRC) in Saudi Arabia (plus $81 million in other special items).

Beyond Alcoa’s ongoing woes, its comments regarding the current state of the market and its view of the second half of this year make interesting reading.

New York investment bank Jefferies is quoted as saying a primary aluminum capacity overhang globally and limited supply constraints are concerns going forward, especially in an environment where demand is likely to be relatively weak.

The aluminum price has drifted lower this year, depressed more by investor fears of a slowing global economy and, in particular, by the impact of the ongoing trade war on the world’s top producer and consumer, China.

In the case of alumina, a small market surplus has the bank concerned prices will continue to drift lower yet, even at current levels of around $350/ton spot. Primary producers’ margins are under pressure, with the LME price in the $1,750-$1,850/ton range. The bank says prices of around $2,100/ton are needed to provide an adequate return; if alumina prices and primary aluminum prices do not find a more equitable equilibrium, more smelter closures may ensue.

Alcoa is currently trying to close or sell two smelters in Spain, following closures across Europe over the last decade in France, Germany, Italy, the Netherlands and Britain.

Yet in the medium term, prospects for aluminum look promising.

Global demand is growing, albeit not at the level it was earlier in the decade. The market remains undersupplied, as demand is exceeding production to the tune of some 1.5 million-1.7 million tons per year.

The shortfall is being met by shadow stocks held by the stock and finance trade, which built up following the financial crisis of 2008 and are gradually returning to the market. In Jefferies’ estimation, global inventories are reaching lows not seen since 2007. So far, this has not impacted either metal prices or investor appetite for the metal.

Looking ahead, S&P is quoted as predicting prices will average $2,000/ton and $2,100/ton for 2020 and 2021, saying the longer-term fundamentals are robust, underpinned by expectations of a continued supply deficit, low inventory and solid aluminum demand growth globally.

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Whether S&P’s longer-term optimism trumps Alcoa’s short-term gloom remains to be seen. Much will depend on global growth and mature markets avoiding a recession in 2020.

After drifting off from a spring high, the nickel price has flatlined in the second quarter (along with much of the rest of the metals complex).

However, the metal has put in a surprisingly strong performance in just the last week due to Indonesia’s announced export ban spooking market concerns about supply, according to the Financial Times.

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Since last week, nickel has reached an 11-month high, jumping 9% to above $14,000 a tonne, the article reports, extending gains since the start of the year to 30%.

In contrast, copper is up just 1.2% in 2019, while aluminum has gained only 2.5%.

Robust demand in China has helped nickel’s overall position this year, but the recent export ban has added fuel to the fire.

Indonesia is the world’s second-largest exporter of nickel ore after the Philippines. In an unexpected move, Jakarta pledged last week to stick with plans to stop exports of unprocessed nickel ore in 2022.

The ban is aimed at encouraging the domestic development of value-added industries, such as refined nickel and even stainless steel production, a policy that has had its ups and downs in recent years but broadly proved successful in encouraging domestic refined metal production.

The Philippines, the top nickel producer, and Indonesia are major ore suppliers to China’s nickel pig iron industry, which currently accounts for some 20% of global nickel production.

Much of the demand for nickel is being driven by stainless steel production in China. So far this year, that demand has been strong. However, as the Financial Times notes, inventories have also been rising, raising questions about the underlying strength of the Chinese market facing the headwinds of a trade war and slowing growth.

Maybe consumers should not be panicking too much about rising nickel prices — a pullback after such a strong rise is likely, especially coming into the summer season when demand in China and western Europe is likely to soften.

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Prices could fall back a little from current highs, but they are unlikely to return to turn-of-the-year levels.

It is just as well Rio Tinto is riding high on a strong iron ore price, as its copper business in Mongolia has hit a cost blowout, according to the Financial Times.

Difficult ground conditions are being cited as the primary reason Rio is having to completely rethink the design and development of its underground mine at Oyu Tolgoi.

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As a result, the first sustainable production is now expected between May 2022 and June 2023, according to the Financial Times — a delay of 16-30 months compared with original guidance — while the cost of the $5.3 billion project will increase by between $1.2 billion and $1.9 billion.

Rio has been producing copper, gold and silver from an open-pit mine at Oyu Tolgoi since 2013, but it has always planned to exploit the mine’s vast underground resources.

The underground expansion is expected to lift output to 550,000 tons per year making OT, as it is known, the third-largest copper mine in the world. At the underground mine, Rio plans to use the cost-effective block-caving technique, a widely used method of mining large – vertically and horizontally — hard rock ore bodies underground.

The procedure involves undermining an orebody, allowing it to progressively collapse under its own weight, as this site explains.  As a large section of rock is undercut, an artificial cavern below the ore body is created that fills with its own rubble as the ore body collapses. This broken ore falls into a pre-constructed series of funnels and access tunnels underneath the broken ore mass. The collapse progresses upward through the ore body, eventually causing large areas of the surface to subside into sinkholes.

The problem at OT is the ore body is too fragile and collapses too easily, making the current design inherently unstable.

Rio, via its majority-controlled subsidiary Turquoise Hill Resources, says it first hit problems last year as it tried to complete a 1.3 kilometer production and ventilation shaft amid changing ground conditions. The firm is now having to look at the relocation of underground infrastructure, resulting in considerable delay and added cost.

Despite these challenges, there is no question that the mine will be viable; copper demand is set to rise on the back of electrification and electric cars, while copper ore grades are depleting around the world.

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The long-term prospects for higher prices are positive — which is just as well, as OT may well have more surprises in store for Rio before it reaches full production.

That the news is all about trade makes a change for us business folks from the tittle-tattle around the private lives of politicians or celebrities, as trade is topic that actually touches all of us (whether we are immediately aware or not).

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That President Donald Trump has made trade dispute a central plank of his first presidency is no surprise.

Throughout his presidential campaign, Trump frequently made reference to what he sees as unfair trade terms enjoyed by America’s trade partners and his intention to use whatever means he could to right the perceived wrong. “Trade wars are good,” he famously said on the campaign trail — he has certainly followed through with that in office.

Just as there appears to be a thaw — or at least a renewed willingness to talk — between the U.S. and China following the G20 summit in Japan, the president has renewed his previous spat with Europe, which ranges across a number of topics.

In addition to the general argument that the U.S. exports less to Europe than Europe does to the U.S., there are specific grievances over automobiles. The U.S. applies a lower rate of duty on European sedans than Europe does on U.S. cars and the company-specific case of subsidies to Airbus, the administration claims, are unfair.

This last one has been the subject of a flare-up this month. The U.S. threatened fresh tariffs on $4 billion covering 89 European products, The Guardian reports, including olives, Italian and Dutch cheese, Scotch whiskey, Irish whiskey, pasta, coffee, and ham. These items join products worth $21 billion that were announced as potential targets for tariffs in April, the paper reports, which included Roquefort cheese, wine, champagne, olive oil and seafood (such as oysters).

The latest list notably also includes a number of copper products, metal consumers should note, including bars, plate, strip and foil (the full list can be found here). The rights and wrongs of the case can be argued with equal validity on both sides, the E.U. claims — and has done since 2004 — that Boeing receives illegal subsidies. Meanwhile, U.S. claims Airbus does.

The reality is both receive state support in one form or another and the WTO has upheld cases in favor of both parties against the other.

So what are you left with?

Read more

Jaguar Land Rover’s (JLR), decision to invest hundreds of millions of pounds to enable its Castle Bromwich plant in the U.K. to build electric cars, as reported by the Financial Times, is interesting on a number of levels.

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Specifically, for JLR it underlines the drastic steps the firm is being forced to take following a collapse of sales over the last 18 months. Buyers have turned away from JLR’s diesel engine lineup — some 50% of JLR’s models are diesel-powered — amid a backdrop of wider automotive sales slumps across Europe and in China.

Switching to petrol engines is but a stopgap for a manufacturer whose range is skewed heavily to larger, less fuel-efficient models.

European environmental standards will require manufacturers to meet a fleetwide average of 57 miles per U.S. gallon by 2021 – already a demanding target with high mix of diesels and a number of electric options in its range.

But with a switch to petrol and following recent suggestions by the E.U. that the limit should be ramped up to 92 mpg by 2030, JLR could struggle to survive.

So, switching to all-electric for some of its key models — like the replacement for the XJ, the flagship Jaguar saloon— is, while immensely challenging, the only viable option.

The challenge — and the source of JLR’s reluctance to build its existing all-electric I-Pace in the U.K. — has been the lack of a U.K. supply chain.

Many of the drivetrain components, like motors, were produced by third parties but are increasingly being made in-house, according to thedrive.com. The most significant factor, however, is the lack of a significant automotive battery maker in the U.K., the Financial Times reported.

Perhaps the imposition of harder post-Brexit borders with the E.U. will encourage U.K. manufacturers to establish a major battery facility at some stage in the future — or, maybe, Castle Bromwich will be the last major automotive investment in the U.K.

Either way, for now sourcing major components from Europe is a brave move, particularly with so much uncertainty around about trade terms.

From a wider perspective, JLR’s investment suggests manufacturers do not believe politicians will carry through with such threats, despite all the current political posturing over a hard Brexit. It also suggests manufacturers believe there will be some form of a softer compromise that allows low-tariff or tariff-free trade with the E.U. and, more importantly, relatively free movement of goods. That, or some solution requiring only light touch border controls that allow just-in-time supply chains to continue to operate with levels of flexibility similar to the current regime.

All other U.K. car manufacturers are either keeping their cards close to their chests while waiting to see the outcome of the Oct. 29 deadline to leave the E.U., or are actively moving to Europe by announcing investment for new models will go into mainland European plants.

JLR’s move is against the current grain and raises the question of whether it has anything to do with the level of state financial support it has received, desperate as the government is to build momentum against the prevailing tide of lost investment to the E.U.

No automotive company invests in new facilities without going cap in hand to the government to see what help it can get; typically it is 9-10%, but it won’t be long before news leaks out of quite how much JLR has secured for Castle Bromwich.

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E.U. state aid rules set limits — but in a post-Brexit world, potentially anything could be agreed.

Iakov Kalinin/Adobe Stock

When you think of the United Kingdom, you don’t normally think “automotive powerhouse.”

Sure, the U.K. has a long and illustrious tradition of making some of the world’s most iconic motorcars.

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Think Rolls-Royce, Bentley, Jaguar, Lotus, Morgan and, my own favorite, Aston Martin. The U.K.  is also home to most of the world’s Formula One racing teams research, development and production facilities.

Yet, at a less glamorous but arguably more important level, the U.K. automotive industry is not only key to the country’s manufacturing base, it also operates as one of the most sophisticated and integrated supply chains in Europe.

As the graphic below from industry site SMMT illustrates, over 80% of U.K.-made cars are exported — over 50% of them into Europe, but the rest worldwide.

On the supply side, more than half of the parts used in making those vehicles come in from overseas, linking Europe into one large, integrated manufacturing supply chain.

Source: SMMT

Vehicle manufacturing is the U.K.’s second-largest manufactured product export, making up 11.4% of the total. By comparison, the U.S. has automotive exports ranked down at fifth at only 8.4% of exports.

So, when automotive production declines in the U.K., even for one or two months, it has a significant knock-on effect to the rest of the economy.

Arguably, the U.K. has not faced such a challenging period since its darkest days in the 1970s. According to the Financial Times, car production in May dropped by 15%, its 12th straight month of decline. Production for the domestic market was 25% lower than the same period last year, while export output dropped over 12%. All of this comes with the backdrop of a fundamentally cheaper exchange rate following the 2016 referendum to leave the E.U., which should have made U.K. exports significantly more competitive.

Source: Financial Times

Part of the reason for the decline, after years of bad press, has been buyers’ sudden change of heart regarding diesel engines.

Some manufacturers, like Jaguar Land Rover, were producing over 90% of their fleet with diesel engines and have been frantically trying to adjust to the market’s growing aversion to oil burners. But equally, it has to be said, carmakers are taking the opportunity to switch investments in new models from the U.K. to the E.U. mainland (in case the U.K. fails to secure a true free trade agreement with the E.U.).

Any form of partial free trade agreement that involves border checks and/or tariffs will have a detrimental impact on the ability of automotive companies to run an integrated, just-in-time supply chain with their European parts suppliers.

Automotive companies see this as a significant risk and, when faced with choices, have opted to favor investment in their European plants, even though the U.K. operations have traditionally performed more efficiently.

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In the unlikely event the U.K. concludes a true free trade agreement — by which I mean one, like now, that does not require border checks — it is possible some of this decline will be reversed.

However, it will take years before carmakers will have enough trust in the political relationship between the U.K. and E.U. to feel comfortable investing hundreds of millions in new models to be made in the U.K.

In the meantime, automotive is unlikely to get back to its recent 2017 peak.

Copper appears to be caught in the crosswinds.

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After months of steady declines from a peak of U.S. $6,600 per ton in April, the copper price had drifted down to well below $6,000 per ton on fears of what impact the ongoing trade war between the U.S. and China would have on top consumer China.

But while trade war tensions continue to provide significant headwinds, an extending strike at Codelco’s Chuquicamata copper mine is raising concerns about supply.

The copper market is considered to be in deficit, according to Reuters, saying the global refined copper market showed a deficit of 51,000 metric tons in March, compared with a 72,000-ton surplus in February. Bloomberg cited the International Copper Study Group, which forecast a deficit of 189,000 tons by the end of this year.

Codelco’s strike has been rumbling on for 12 days now. Chuquicamata is the company’s third-largest mine, producing 321,000 metric tons last year (so over 10,000 tons have been lost so far).

Some 3,200 workers at the mine are represented by three unions. Their grievance is focused on comparable terms of employment between retiring older workers and incoming new workers. The company is holding back on the more generous terms older workers enjoy as they negotiate the severance of some 1,700 workers due to the transition from open pit to underground mine in the next 12 months.

So far, Codelco says it has made the best offer it can.

Workers, however, are not satisfied.

Negotiations are at an impasse. The union is going back to the workers later this week for an extension to the strike. In and of itself, the loss of Chuquicamata’s production is not critical for the copper market, but it heightens concerns about where supply is going to come from, as investment in new mines has been depressed for some years by excess supply and low prices.

Perversely, though, inventory has been rising.

Both the LME and SHFE have seen increases in stocks this year, although they have fallen somewhat in the last month or so. Generally, inventory levels do not suggest a market in crisis.

So, what can we make of the recent price rises: are they purely a reaction to the Chuquicamata strike and a weaker dollar boost to commodity prices, or the buildup for a move higher?

Demand, while less robust than previous years, remains fairly solid. Much of the negativity is down to fears over the trade conflict between the U.S. and China, as is the case with much of the commodity and equity markets; a resolution to that squabble would see a return of optimism and higher prices.

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Without it, though, it is hard to see significant upside to copper this year — the fundamentals are not supporting that yet. In the meantime, sentiment is king.

Chinese steel mills are caught between the proverbial rock and a hard place.

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Iron ore prices surged to their highest level in five years on the back of mine closures in Brazil and robust demand, the ABC reported.

Vale’s Feijao mine disaster, which killed around 250 people, has resulted in the loss of around 6% of seaborne supply since late January, the ABC reports.

The market is feeling the squeeze.

Iron ore inventories at Chinese ports have dwindled away to the lowest level in more than two years. The current price is approaching U.S. $120/metric ton, still well short of the record U.S. $191/ton in early 2011 or the $160/ton reached in the last big rally seven years ago. However, the current price is still rising inexorably and resulting in mill margins becoming so pressured that some producers have slipped into the red.

Chinese steel futures are reacting to the tight market with rebar prices hitting a near eight-year high and hot-rolled coil climbing to an all-time peak, Reuters reported. Steel demand from downstream sectors in China is reported to be very strong, yet finished steel prices are not rising fast enough to spare steel mills from becoming squeezed in the tight raw material supply market.

Needless to say, with delivered cost prices from Australian iron ore mines into China at around $30 per ton, Rio Tinto, BHP and their smaller brethren are making hefty margins. But in recognition of the probability that Brazil’s mine closure issues are more short term than long term, Australian miners are not investing in major new projects. Rather, they are spending cash paying down debt, making cost-saving investments and distributing surpluses to shareholders.

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Elevated iron ore prices are not expected to persist into next year. The consensus forecast is for prices to drop back into the $80-$90 range by next year, ABC reports, so Chinese steel mills’ pain is likely to be relatively short-lived.

Following consolidation in the industry and the closure of many illegal or unlicensed producers, the remaining behemoths will be able to ride out the few months of negative or poor margins in the expectation falling raw material costs and/or rising finished steel prices will come to their rescue later this year.

alfexe/Adobe Stock

During his presidency, Donald Trump has taken on friend and foe alike — often with equal vigor — if he believes some degree of unreasonable behavior has been going on to the detriment of the U.S.

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The E.U. has experienced its fair share on that front: tariffs on steel and aluminum (along with much of the rest of the world), threats to the automotive industry (particularly the German car industry) in the form of heightened tariffs and threats to pull out of NATO if Europe doesn’t pay its way.

So far, much of the aforementioned has proved to be bluster. Subsequent negotiations have watered down some of the threats and/or postponed implementation to allow for some form of a negotiated settlement.

But according to a report in The Telegraph, the latest object of the administration’s ire could result in a much more serious breach between the old allies.

That the Euro is undervalued and the dollar relatively overvalued is no secret.

That both are where they are, it has to be said, is also not due to one or two simple actions but to a combination of circumstances — some deliberate and often coming with both intended and unintended consequences.

The dollar, for example, has hit a 17-year high, according to the Federal Reserve’s broad dollar index, The Telegraph reports. Trump’s tax cuts came at the top of the cycle and pushed the budget deficit to 4% of GDP, encouraging the Fed to prematurely raise rates last year.

Meanwhile, the manufacturing trade deficit has ballooned to $900 billion as U.S. manufacturers struggle against a strong dollar and the imposition of import tariffs raising raw material costs. After an initial boost, this is now having a toxic mix of depressing economic growth while holding up the dollar, making an export-led recovery harder.

The Euro has gone in the opposite direction.

Quantitative easing (QE) has depressed the Euro for the last five years. The trade-weighted index fell 14% a year after Mario Draghi, president of the European Central Bank, signaled bond buying was coming in 2014. That has been a powerful stimulus, such that Germany is now running a current account surplus of 8.5% of GDP and Europe as a whole is running a surplus of $300 billion-$400 billion per annum.

Since QE stopped last year and hastened by a slowing China, growth in Europe has slumped; the ECB is desperate to get it going again.

But the ECB will have to be a lot more radical than it was with previous measures.

Yields on 10-year German Bunds are -0.3%, in the paper’s words, and the bond markets are signaling an ice age. Inflation expectations — and, by association, growth — have collapsed, but the ECB will have to get radical if it is going to achieve any impact, which will be seen as currency manipulation in Washington (a position that, for once, lawmakers on both sides can agree on).

The president will have plenty of support for retaliatory action.

The article suggests one measure is playing Europe at its own game. The Economic Policy Institute in Washington proposes buying the bonds of any country engaged in currency manipulation to neutralize the effect by driving up the value of its currency (in this case, the Euro). Used in conjunction with the president’s favorite approach of slapping on tariffs, the most likely target being cars, that type of response would have a deeply damaging impact on the European economy.

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Battle lines are being drawn — all eyes are now on the ECB’s next move.

Are gold prices really going to keep rising? Source: Adobe Stock/Nikonomad.

Gold powering to $1,400 an ounce sounds rather optimistic, but is actually not too far from the truth.

Spot gold has already gained about $80 so far this month, pushing the price this week to its highest level in more than five years.

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We have reported earlier about the rising appetite for gold in the form of ETFs and physical metal, but investors’ enthusiasm was spurred this week by dovish comments made by the Federal Reserve on Wednesday regarding interest rates.

Where previously the Fed has indicated patience and a watch-and-see policy, this week it signaled a possible interest rate cut as soon as next month.

The Fed is apparently worried about a deteriorating domestic and global economic backdrop, according to Reuters. A combination of damaging trade wars and slowing growth in all the major trading blocs, set against a backdrop of a potential end of a bull market cycle, is getting not just central banks but investors worried, too.

CNBC cited more technical issues around the movement of longer-dated treasuries as a major stimulus to gold buying (at least this week). The article states the 10-year Treasury yield slipped below 2% for the first time since November 2016, breaching an important psychological level, adding that the surge in gold prices was likely driven by the declines in yields of shorter-duration Treasuries ranging between three months and two years. The yield on the three-month Treasury note trickled lower to 2.146%, while the two-year note dropped to 1.716%.

Whether the Fed will cut rates next month will be driven by a number of factors, not least of which will be the impact of a strong dollar on U.S. exporters. The European Central Bank and the Reserve Bank of Australian have both signaled they intend to cut rates.

The Fed’s news this week has taken the edge off the dollar. Relatively speaking, however, other trading blocs appear ahead of the Fed in easing monetary policy. There is talk of quantitative easing returning in Europe, a move that could spark trade tensions between the U.S. and the E.U. as the Euro weakens further (which will be the subject of an upcoming followup piece on MetalMiner).

MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel

Meanwhile, gold is in fashion and, in the absence of any contrarian news, appears set for further gains.