Author Archives: Stuart Burns

Some of the merchant banks would have us believe we are in the grip of another supercycle.

Certainly, the relentless recovery in commodity prices following last year’s lows appears graphically like a repeat of the relentless rise in prices during the last supercycle in the first part of this century.

commodities graphic


During that supercycle, support came from a gradually depreciating dollar. However, it was driven mainly by a relentless historic rise in demand from China and the belief that where China led, the other BRICS nations would follow.

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Supercycle or no supercycle

Prices of iron ore, oil, and base metals (such as copper, aluminum and tin) have all been rising relentlessly on the back of a marketwide embrace of risk-on sentiment.

Prices have suffered — or enjoyed, depending on your position as producer or consumer — a perfect storm of factors.

Vaccine rollouts and, with the tragic exceptions of India and Brazil, falling COVID-19 infection rates around the world have fueled positive sentiment among investors chasing better yields.

The constrained global logistics market is pushing costs up and creating shortages across multiple supply chains. That is further incentivizing restocking such that shortages become a self-fulfilling prophecy and manufacturer lead times extend.

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Nickel prices and, as a result, stainless surcharges, remain in the doldrums this month, recovering only slightly from last month’s sharp sell-off.

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Nickel prices drop in March

nickel price

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Nickel’s bull story took a hit at the beginning of March by announcements from China’s Tsingshan Group. The firm said it intended to produce battery-grade material from nickel matte, undermining the market’s electric vehicle (EV) narrative.

That is last month’s news. Reuters confirmed the move would effectively close the processing gap between the sort of nickel used by the stainless steel industry and that used for lithium-ion battery production. That undermines the perception that battery-grade nickel is a constrained market facing a looming wall of demand.

Yet, EV demand has always been part of the future, rather than the present.

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The prospect of buying an electric vehicle (EV) may fill you with anxiety.

That is, range anxiety, charging point anxiety,  reliability anxiety and resale anxiety.

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Sales rise despite electric vehicle anxieties

electric vehicle charging

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Tesla’s vehicles were ranked at the bottom for reliability in a recent customer poll, scoring a miserable two stars out of a potential five.

So far, EV resales have held up relatively well. However, anxiety remains regarding a significant technological breakthrough that would make used models “obsolete.”

Such anxiety, however, is not the point. Sufficient among us are taking the plunge, so much so that EV sales are skyrocketing.

OK, skyrocketing from a low base. But in percentage terms, sales are rising faster than for any other sector.

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Brussels must feel a little like the Dutch boy with his finger in the dike when it comes to emissions.

No sooner do you create a solution to one problem – costing carbon dioxide emissions – than you create another – putting your domestic industries at a global disadvantage.

The Financial Times reported on calls by European industrial groups for the EU to introduce a carbon border tax. Rapidly rising prices for CO2 allowances raise the cost for the most-polluting industries far above any other region.

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EU’s Emissions Trading System aims to encourage reduction in emissions


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According to the Financial Times, carbon prices in the EU’s flagship Emissions Trading System (ETS), a cornerstone of the bloc’s ambitious new target to slash emissions 55% by 2030, are within touching distance of €50 a metric ton. That’s more than double their pre-pandemic level.

The ETS is intended to encourage investment in technologies that reduce carbon emissions by placing a financial burden on producers who simply maintain their existing level of emissions. The EU grants allowances to polluters and allows them to trade them in order to allow a commercial price to develop – if you like letting the market decide what the balance is between paying to pollute and investing more to avoid the cost and pollute less.

The problem appears to be that anticipation among traders and commercial buyers is supplies will tighten as the available allowances will shrink over time.

The result? Rising prices for those allowances left, piling pressure on the most polluting firms.

Competition fears

Rises this year have prompted Tata Steel to place a €12 ($14.40) per metric ton surcharge on its European steel. The fear is further increases will make European producers increasingly less competitive against imports from countries with no such taxation system.

The post reports estimates made by steel producers that the EU carbon price is now costing them approximately $95 ($114) per metric ton of steel produced. (The production of one ton, on average, emits two tons of CO2 the post suggests.

That equates to almost 10% of the current steel price near €1,000 ($1,200) a metric ton.

Producers go on to suggest the estimated annual hit to the EU steel sector from having to buy carbon allowances from the market could hit €3 billion this year. Steel producers would have to pay to buy shortfalls in their allowances from the open market.

Pressure builds

The EU was due to unveil proposals for a carbon adjustment border tax in June. However, its implementation is not likely before 2023, at the earliest. Now, pressure is building to move up implementation to later this year.

The proposed border tax mechanism is initially set to target limited goods. Those include steel, cement, power generation and some chemicals. The mechanism will target goods imported from non-EU countries that do not have equivalent carbon pricing or emissions targets.

Ultimately, though, it could be extended to any carbon-intensive product. That includes other metals, like aluminum, zinc and ferro alloys (like FeMn and FeCr).

Distorted market

Letting the market decide the cost of polluting has merit. Price discovery in that way is likely to be more efficient than government-mandated prices.

However, the problem is the EU controls the provision of the allowances, making it a rigged market. It’s not an intentionally rigged market but one distorted by decisions made in Brussels on the size and allocation of allowances.

Steel suppliers selling into Europe and buyers from outside the bloc of components containing a significant steel content will therefore see the EU become less attractive in the run-up to the middle of the decade.

That is, unless or until similar carbon pricing policies are adopted elsewhere.

There is often a price to pay for being in the vanguard.

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

supply chain chart

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Metal prices have been rising this year, in part because of a rapid recovery in consumer spending and manufacturing following last year’s lockdowns. China led the recovery, but the recoveries have strengthened in North America and, to a lesser extent, Europe.

As vaccines have rolled out, particularly in the US, sentiment has improved. Consumers have begun to spend some of that US $5.4 trillion — estimated by the Financial Times — of pent-up savings amassed during the lockdowns.

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Supply chain woes

However, constrained supply is also a major driver of metal prices.

In some cases, such as copper and zinc, this has been from lockdowns in major resource countries like Peru. In addition, tariff barriers have further squeezed consumers’ supply options.

The US added anti-dumping duties on some 18 aluminum sheet supplying countries earlier this year. Meanwhile, the European Union added aluminum flat rolled countervailing duties this year. Those added to those already in place for extrusions from last year on China. As a result, the moves significantly tightened aluminum supplies into the European market.

Further pressure has come from global logistics constraints and cost increases. That has come principally on the Asia to North America and Asia to European shipping routes. Routes have seen shipping delays, container shortages and a near tripling of freight rates over the last 12 months.

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Cautious production increases by OPEC+ and a strong business cycle upturn have encouraged bullish sentiment about downward pressure on oil inventories and upward pressure on the oil price in the second half of the year, Reuters columnist John Kemp reports in a recent post.

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Oil prices ease as infections rise in major importers Japan, India

oil price chart

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But prices have eased off last week and into this one. Initially, this came as caution rose over the prospect of output increases from shale producers. More recently, however, resurgent coronavirus infections in India and Japan, both major oil importers, have weighed on prices.

Despite growing optimism in the US and, to a lesser extent, in Europe, India’s oil demand remains in doubt.

India has posted several days of record-setting COVID-19 cases, with expectations they are going to get even worse. Bloomberg reports that demand for fuels could plunge by 20% in April.

It seems likely that new lockdowns could be in place for several weeks or even months. In turn, that would seriously impact Indian demand.

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Earth Day concept

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Today is Earth Day, whatever that means for you. For once, though, the politicians are not adding to greenhouse gas emissions by flying around the world first class or, worse, in private jets to talk shop.

Rather, they are gathering virtually.

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Earth Day news

According to The New York Times, they will hear President Joe Biden commit the United States to cutting CO2 emissions nearly in half by the end of the decade.

It’s a target that would require Americans to transform the way they drive, heat their homes and manufacture goods, the post reports.

Although the time frame is longer, the new goal nearly doubles the pledge that the Obama administration made to cut emissions by 26-28% below 2005 levels by 2025. It also builds on the UK’s ambitious plans announced earlier this week.

Nathan Hultman, director of the Center for Global Sustainability at the University of Maryland, described the 50% goal as attainable. However, it will require “pretty significant action across all sectors of the American economy.”

Autos and energy generation are tipped as two of the major industries to feel the impact of the new target, if supported by new legislation.

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Unfortunately for all those who passionately support efforts by people like David Attenborough to force the world to confront climate change – regardless of where you stand on the issue on what is admittedly quite a wide platform – recent reports suggest we are now in the land of political signaling in environmental policy rather than earnest endeavor.

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UK makes major environmental policy shift (on paper, at least)

environmental policy

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As The Spectator reported yesterday, British Prime Minister Boris Johnson and Business Secretary Kwasi Kwarteng announced that the government would enshrine in law the target of cutting the UK’s carbon emissions by 78% by 2035.

That’s 15 years earlier than originally planned.

Why today make Britain a world leader in tackling climate change? Largely, because it is a nice commitment to be announcing in the run-up to the COP26 climate summit in Glasgow this year.

Ardent supporters of environmental issues, of course, welcome the news. However, it would require a lot of big lifestyle changes in terms of diet, transport and housing for the general public. Furthermore, left to government, it will cost both the state and individuals a lot of money.

Environmental policy in the US

Across the Atlantic, the Biden administration is in danger of going down the same road.

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We wrote about the copper market and what smelter treatment charges are telling us about mine supply — and, hence, refined metal supply this year.

Treatment and refining charges have collapsed. That is a sure sign that refiners are struggling to secure concentrate supply as mines’ recovery, largely due to COVID-19 effects, lags global industrial recovery.

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Zinc treatment charges

The story is somewhat similar for zinc treatment charges.

Reuters reports last year’s 10-year high smelter treatment charge of $299.75 per metric ton based on the expected surge in mine production failed to materialize. COVID-19 lockdowns rocked large supplier countries such as Peru and Mexico.

As a result, this year’s benchmark smelter terms have almost halved to $159 per ton, Reuters reported. That marks its the second-lowest level in a decade.

The last time treatment charges were this low, zinc rose to $3,596 per ton in 2018.

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Copper bulls who were betting on continued price rises — or, more importantly, copper consumers worried about escalating copper costs — may be looking at the copper price and wondering what is going on.

Prices hit over $9,600 per metric ton in late February but have since fallen back.

Although experiencing volatility, the copper price has traded in a roughly +/- 2% band just below $9,000 per metric ton since.

copper bars

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Copper price views

Bulls like Goldman Sachs argue this is just a pause, ignoring the build in LME stocks. Instead, it points to the collapse in smelter treatment charges as proof the market remains tight.

Low mine output results in tight concentrate supply. When that happens, smelter treatment charges chase the market down in an effort to secure concentrate to process. Treatment charges rise during times of plentiful concentrate supply and fall during times of concentrate famine, Reuters notes.

The contract treatment price for Q1 is $59.50 per ton, the lowest since 2011.

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