Author Archives: Stuart Burns

Well one analyst is anyway. Liberum Capital released an interesting report to investors last week along the following lines which if correct we felt has some interesting observations for our readers.

Liberum drew initially on the significant falls in mining stocks with the sector down about 19% since May with heavy falls last week in US Steel stocks down 10% and iron ore miners down 6-7%. The catalyst to recent falls appears to be a big drop in thermal coal prices precipitating a wider sell off but particularly in the steel sector.

Some of the key points observed were:

  • Traders reporting large stocks of heavy grade plate in the EU with stockholders offering lower prices as stock levels reached saturation level
  • Arcelor Mittal admitted it had experienced trouble passing on the May price increase for flat rolled in the US
  • GM, Ford, Chrysler and surprisingly Toyota  are seeing dramatically lower sales and hence purchases this quarter
  • Metal Bulletin reported southern Europe rebar and wire rod sales quiet as a result of the construction slow down which is likely to continue for a year or more. MB also reported FeCr prices down 5% in China due to lower demand
  • Coking coal spot prices remain at $350/ton but with some trades down to $300/ton, the market for coking coal is still very tight
  • Iron ore sales remain stable at $180/ton in the spot market but inventories in China are very high. With fuel and hence freight rates at record highs the higher FOB prices secured by Rio Tinto and BHP are providing lower CIF prices than Vale’s material shipped all the way from Brazil. Consequently Rio  and BHP are tipped as better buy options than Vale

With ferrochrome trading at 2x marginal cost there is little to support a further slide in prices. Likewise vanadium prices are sliding but molybdenum and manganese remain firm, although manganese trades at over 3x marginal cost so any weakness in demand could see a slip in prices.

The conclusion to the report was that share prices for producers in certain commodities are at risk because of the prospects for prices this year. Those at risk were steel raw materials and those considered safe were precious metals, aluminum, copper and nickel.   This analysis broadly supports our own reports on these metals over recent weeks.

–Stuart Burns

Our thanks to Michael Rawlinson of Liberum Capital for the reproduction of parts of his investors report

Is China at risk of Blowing up as the headline in the British publication the Daily Telegraph reads?

Coming fast on our blog last week (I wonder if that is what prompted the Telegraph to cover this topic?) the paper makes the case that not only is inflation putting China in particular, and Asia in general, at risk of a crash but they add energy and transport into the mix ” the former leading into the latter. Pointing to the number of low cost manufacturing jobs coming back to the US or Mexico such as furniture, shoes, textiles, etc, a trend we have seen considerable anecdotal evidence of ourselves, the article explains how freight rates have tripled on the back of rising fuel costs. Of how energy prices in China have been capped by the government and subsidized to be kept low but how this is a temporary  tactic that can not be perpetuated for long. The Asian economies and business models were built on the concept of cheap labor but were underpinned by cheap energy. China’s use of energy per unit of gross domestic product is three times that of the US, five times Japan’s, and eight times Britain’s. China’s factories were not built with current energy levels in mind and when the true impact of current costs is fed through the impact could be dramatic.

The affect of high energy costs on the metals markets has been significant with costs passed rapidly down the line to the fabricator or end user. To what extent a relocation of manufacturing would impact the patterns of consumption remain to be seen, but as we have seen with the distortions in the US steel market it is as much where product is consumed as how much is consumed that has the most significant impact.

–Stuart Burns

Has Nickel Hit Bottom?

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Non-ferrous Metals

Nickel has fallen by more than half since April 2007 due to falling demand for stainless steel. With announcements of further cut backs in China and Korea and Steel Business Briefings recent survey suggesting 44% of European buyers expect demand to drop further in the 3rd quarter the future is not looking bright for nickel.

However, when the news is all one way, it may be time to look for the turn and indeed there are a number of indications that the fall may have gone too far. Much of the production now appears to have been adjusted to meet current demand and the Chinese cuts were in fact deferred expansion plans rather than true cuts. Chinese purchases are running at almost double last year and there are a number of potential supply side disruptions in the form of energy shortages in South Africa and Australia, plus rising production costs due to coal that may persuade some marginal producers to cut back nickel production at current price levels.

Although the market appears well stocked with LME inventories at around 5-6 weeks of demand, the current feeling is the market has fallen about as far as it is likely to go. With the LME at marginally above $20,000 last week, support at that level will be a crucial test of the bottom.

–Stuart Burns

Our thanks to Standard Bank’s Quarterly analysis report for some helpful insight.

Having gone on record a little under two months ago that the lead market had moved into over supply and prices would continue to come off we were a little alarmed to read that our predictions could be thrown into doubt by a recent article drawn from a Bloomberg report . According to this and another report  the e-bike or electric bike market in China is consuming 20% of the country’s lead consumption and is rising from 13 million units in 2007 to 16.3 million this year and will be over 23 million by 2010. How could I have missed this burgeoning new market for lead, was I asleep? In a panic I whipped out my calculator and started checking these figures. Each battery uses about 5 kgs but the trend is towards larger machines which will use up to 10 kgs, so on average lets say 8 kgs at present. A little more digging revealed the battery life is only 1.5 to 2 years, so the after market is huge. Assuming your e-bike doesn’t get crushed under a 20 ton truck on China’s rapidly filling highways you will need to replace the battery let’s say every 18 months. China will produce 2.8 million tons of lead this year according to Standard Bank. Calculator is no good, we need a spreadsheet, – we have replacement demand lagging new build but rising with it over time. Five minutes later I have a percentage for e-bike battery consumption in 2008 ” 4.82%. Mmm it’s a bit less than 20% and I suspect closer to reality but even my 4.82% rises to 7.23% next year and 9.6% in 2010 which becomes a significant figure when you consider China will be producing some 3.3 million tons per annum of lead by then.

Will it lift prices? We still think not, lead stocks are rising even faster and the market is due to be in surplus to the tune of 356 thousand  tons this year and 709 thousand  tons in 2009 ” according to our goods friends at Standard Bank. Since our May article, the price has fallen from $2300/ton to $1700/ton on the LME , so far so good. There is only one thing we like more than finding a new market for metals, and that’s not being proved wrong!

–Stuart Burns

The main plank for rising commodity prices and the basis for interest from the investor market has been demand from emerging markets, particularly Asia. Many analysts have seen the softening of demand in North America as being offset by a rising demand in Asia such that global demand will continue to outstrip supply for many metals and other commodities. The belief has been that the emerging markets can decouple their economies from those of the west such that Asia will power ahead while western markets languish with zero, or worse negative, growth.

So it is interesting to note that on top of reports of an imminent recession in manufacturing in many European countries we are also seeing growth forecasts slashed in Asia. Korea has slashed growth forecasts from 6% to 4.6% as the country  faces the same problem the rest of Asia is struggling with ” inflation.

Indeed it may be runaway inflation and the need to raise interest rates dramatically that will put the brakes on these previously high octane economies. For the west to drop from 2 or 3% growth to 1% growth is painful but for the emerging economies to drop from 8-15% growth to 2-5% growth will be dramatic and will feel like a full blown recession. The corresponding drop in demand and de-stocking that will result in the metals markets could change the outlook from the current blind belief that demand must rise inexorably upwards. Inflation in Asia is on the verge of getting out of control with rates exceeding 20% in some markets like Vietnam and Kazakstan.

Even previously solid markets are seeing rising inflation like Thailand 8.9%, Philippines 10%, India 11%, Indonesia 11% and China where inflation has exceeded 10% for much of this year is not only raising interest rates but increasing bank reserves and allowing the currency to strengthen at an annualized rate of 20% in the first quarter, choking off exports, as the authorities desperately try to cool the economy. Cumulatively these changes will bring about slower growth and hence a more manageable demand. Let’s hope that feeds through into the metals markets in an orderly fashion.

–Stuart Burns

We have written recently about the price of aluminum and expressed our belief that the high stocks and current excess of production over demand should keep a cap on prices. Western world unwrought aluminum stocks rose from 1.58 million tons in April to 1.67 million tons by the end of May according to a Reuters article. So it was a little surprising to see a UBS bank report suggest that the high price of energy, particularly coal, could hasten the closure of many less viable production facilities and hence push the aluminum market into a deficit of 200,000 tons by the end of this year. Read more

Well, this would be an interesting one for the anti trust authorities. If the world’s largest steel maker Arcelor Mittal were to take a controlling stake in one of the world’s largest iron companies, what kind of advantage would that give Mittal over their opposition? In a Reuters article today, it is reported by Goldman Sachs, the board of which he recently joined, that Lakshmi Mittal is considering taking a 9% stake in Rio Tinto, similar in size to that of Chinalco and Alcoa earlier this year. As the world’s largest steelmaker — controlling one of the world’s lowest cost iron ore producers — Mittal  could control the delivered price of steel while  distorting the cost base of his competitors. All the steel producers are scrambling to control their raw material costs by buying into producers or production assets; Mittal themselves recently increased their share in McArthur Coal to 19.9% at the same time that South Korea’s Posco took a 10% stake in the same firm. Macarthur supplies steel mills with more than a third of the world’s pulverized coal and had been the subject of rumors that one or more steel mills was trying to make a full takeover.

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Car Prices to Rise

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Speaking at a shareholders’  meeting in Japan, Nissan’s Carlos Ghosn warned that car prices would rise regardless of the strength of the market because of the soaring cost of steel. Prompted by Baosteel’s agreement with Rio Tinto to accept a near doubling in iron ore prices, Ghosn was warning that all steel makers would feel the increase in one way or another and in turn they would pass this on to automakers around the world. Earlier this year, we similarly reported that the price of steel could hurt the price of cars.

We are not so sure the knock on effect of Rio’s record breaking price increase is quite so dramatic, though. Rio’s contract sales deal with Baosteel is FOB Pilbara and the increase over the price Vale agreed with the Chinese earlier this year was justified on the basis that freight rates from Australia to  Asia are very much less than from Brazil. The total landed cost for the Chinese (and Japanese, Korean, Taiwanese, etc) steel mills will therefore be no more on material purchased from Rio (and probably BHP which is still in negotiation) than it is from Vale. Indeed with freight rates for bulk carriers rising this year it may actually be cheaper than the Brazilian material.

One has to sympathize with Carlos Ghosn. Automakers like Nissan are caught between falling sales driven by a weak consumer market in the west, the worldwide move to smaller more economical cars due to the high cost of fuel (smaller cars mean lower profits per unit sold) and the rising cost of not just steel but plastics and non ferrous metals. Steel price increases alone are estimated by Nissan to result in a 3% increase in car costs this year.

Better order that convertible you had your eye on for the summer now, before the price rises!

–Stuart Burns

As a metal, molybdenum has had a funny life. For decades the price bumped along around $ 2-4/lb, largely produced as a by-product of copper production with a few pure play molybdenum mines operating as swing production if the price rose sufficiently to make them viable. Molybdenum grades are so thin, typically between 0.01 and 0.05% Mo in copper mines and 0.12 to 0.20% Mo in primary molybdenum mines, that production as a by-product from copper mining is generally far more viable. Then on the back of rising demand, the price has relentlessly risen since 2003 from $5/lb to $33/lb today. Indeed the metal spiked even higher during 2005 as China closed smaller mines but a return to previous output levels the following year and a general shift from 316 stainless to lower nickel/molybdenum grades has helped prices to ease a little since. However many observers are expecting the price to stay high and even rise further. 93% of mined molybdenum comes from three regions, South America, North America and China and though  new mines can take years to bring on stream, supply is constrained more by limited roasting facilities, the process required to take ground ore to Molybdenite concentrate. New roasting facilities are expensive and environmentally sensitive so they take a long time to come on stream. But with the price over $30/lb it’s no surprise that many plants are being planned. Rio Tinto has a $270m autoclave planned for their Bingham Canyon operation near Salt Lake City and Peru, Canada and Argentina all have new facilities coming on stream. Read more

Ferro Silicon: Further to Go?

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The Ferro Silicon market has gone through some rapid price escalation over the last 12 months, but finally appears to be drawing breath. To understand what drives the price does not require any great insight. Ferro Silicon is produced from silica (usually a form of sand), coke, a source of iron (such as scrap or furnace metallics) and of course a lot of power. Larger electric arc furnaces are used to make higher Silicon content FeSi of about 15% and up. On the demand side most FeSi is used in the steel industry for a number of applications, including alloying in a wide range of iron based materials and deoxidizing, in addition to the production of magnesium from dolomite via the Pidgeon process (that’s the inventor not the bird!). Steel production has undergone huge growth these last few years and is still growing globally at a robust rate. So with rising input costs in the form of coke and energy prices, and rising demand from the steel sector it is no surprise FeSi prices have risen 50% in the last year.

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