Author Archives: Stuart Burns

China has come under a lot of adverse  press during the last year or two over its investments in mining resources around the world, particularly in Africa. The suggestion is that China is trying to corner the world market on raw materials, depriving the rest of the world from access. What is the reality, and are these accusations justified? Read more

We don’t necessarily share the analysts‘ predictions that there is an imminent risk of aluminum rising to $3300/mt and beyond this summer — but we can see good support for the metal around current levels af $2900/mt. Where slowing demand is finally resulting in an easing of prices for most metals, aluminum is exposed to the risk of power brown outs disrupting supplies in many markets: Brazil, New Zealand, South Africa and most notably China. Consumption is forecast to grow in China, although we doubt the figure noted of 20-30% will be met this year as the economy cools slightly. Demand is softening in western markets, which will partially counterbalance Asian demand growth, but aluminum is almost uniquely sensitive to power costs as on average one third of the final ingot price is down to electricity. China is particularly at risk as the country has invested heavily in smelter capacity, currently 12.5 million tons per annum, on the back of historically cheap power. With power costs rising on the back of oil, gas increases, and most importantly thermal coal increases, many of these smelters could be marginal as the latest price rises feed through this year.

If capacity is idled and China becomes a net importer, the availability of metal on the world stage will change from the current comfortable balance to dwindling stocks in short order. It’s the risk which is giving aluminum its support.

–Stuart Burns

China is without a doubt the most dynamic emerging market of the decade. For  the world’s largest communist state, it must feel like they are sailing a ship driven by the wind in one direction and the tides in another. After tax and regulatory changes last year that would have stopped most economies in their tracks, China’s growth has slowed a fraction —  from 11.9% for 2007 to 10.6% for the first quarter 2008. But the story is anything but a gentle reduction in growth. Under the surface, there have been changes in investment with winners and losers all around. Read more

In spite of statements from China in  Bloomberg,  stating that $2400/ton is the support level for lead and that China is cutting back exports to support the world price, the metal has continued to fulfill its image and has sunk like the proverbial lead balloon. The reality is China, which produces a third of the world’s lead, would lose money if it exported at current levels. Dealers are hoping the cessation of Chinese exports may support the price but so far there have been no signs that this is the case.

Following five years of  shortages earlier in the decade and massive investment in new mines, the metal moved into surplus and stocks have now reached an 18 month high precipitating the fall in prices to close at $2195/ton on Friday. The sentiment remains overwhelmingingly negative and prices could fall further.

–Stuart Burns

Just when consumers thought one of the main drivers of current material cost ” sea freight rates ” would be coming down as new shipping capacity came on stream, it looks as if the credit crunch has done for them what it has for the housing market, according to a Bloomberg report.

Small to medium sized shipyards and those new to the market are finding it increasingly difficult to  find loans. Previously, owners could expect to pay 1% over Libor for 12-15 yrs and be able to borrow up to 85% of the value. Now rates are higher than the 1% premium, the terms are reduced to 10 years and borrowings to no more than 65% of the value. Consequently, only the larger lines and owners with deep pockets can afford to keep their orders firm. Shipbuilding grade steel has increased by 47% since the start of the year and the viability of some of the Chinese shipyards not yet built but who had taken orders for new vessels is in doubt. Brokers estimate between 10 and 30% of the 2561 new vessels on order will not be built. No surprises then that freight rates have already begun to increase again as the availability of space has decreased. Rates  were expected to decline by 56% over the next three years but instead are at a five month high as far fewer vessels have been delivered. Read more

Gold has certainly had a roller coaster ride this last 12 months, up to a peak of $1030/ounce before falling back some $200. You’ve heard the popular saying: “When the dollar falls, gold rises.” In reality, the relationship between the euro, the dollar, and gold has been 94% accurate, according to a   Reuters report in Mineweb.

In that case,  what could the current fall in gold tell us about the direction of the euro and the dollar? If the dollar were to make a significant gain against the euro this year, from its current 1.55 towards 1.45 last seen in 2007, we could see a flood of cheaper imports, particularly steel, come into the market. The dollar won’t change the fundamentals of the world steel industry, but a combination of a stronger dollar and more imports could curtail price rises later this year if the assumed relationship between gold, the euro, and the dollar holds true.

–Stuart Burns

Return you say? Since when was a penny made from steel? Well, for any of you too young to remember (thankfully that includes me) the US minted steel pennies during the second World War. The rising cost of metals has meant the US mint is losing $100 million a year making 7.4 billion pennies and 1.2 billion nickels at considerably more than their face value. At current metal prices, it costs 1.26 cents to make a penny (97.5% zinc and 2.5% copper) and 7.7 cents to produce a nickel (75% copper and 25% nickel).  That is better  than late last year though when a penny was costing 1.67 cents and a nickel nearly a dime. It’s debatable if this money is lost as it remains in circulation but the House panel that overseas the Mint would like a debate on the merits of bringing back a predominantly steel penny and nickel according to an article in the Associated Press. It raises a bigger question why not just junk the penny altogether ” when did you last buy anything for a penny? The country could save on precious metal resources not to mention costs, if it just dropped a coin that many would argue is out of date. According to Henry Paulson getting rid of the penny made sense but wasn’t politically doable ” now is that just the kind of logic you expect from a politician?

–Stuart Burns

Is the rise in metal prices really so inevitable? We usually place considerable weight on articles appearing in, but I have to take issue with a feature from yesterday which suggests metals will continue to rise on the back of power problems around the world. Certainly the first quarter of this year has seen it’s fair share of power problems, but many of them are unlikely to be repeated — nor was power the sole driver behind first quarter price rises. For example, the bad weather in China caused power problems, but it was a one in 50 year period of severe weather. Also, it is unlikely to be an issue going forward, serious as it was for aluminum, zinc and many ferro alloys. Power stations may be closed or run at reduced capacity for the Beijing Olympics, but so will the power hungry industries those power stations fed. The power problems affecting aluminum,  precious metals  and ferro alloy production in South Africa are more entrenched, but they were significantly exacerbated by heavy rains, as were the flooding of Queensland’s iron ore mines  — neither of which is likely to be of such magnitude again in the coming months. Somehow  I don’t see power being the deciding factor. It will have an influence in certain situations, but the extent to which demand continues to grow will be more of an issue.

–Stuart Burns

Contrary to expectations earlier this year that the weak dollar would boost exports and shield domestic producers from imports, it looks like US imports are set to rise again, according to the Steel Business Briefing. Sighting import license applications SBB says US applications for April came in at 2.64m metric tons, 16% higher than the March preliminary import count of 2.28m tons, which in turn was higher than February. Interestingly, this is despite a continued decline in steel imports from China, suggesting the export taxes imposed in January by the Chinese authorities are having the  desired effect. For April, China will likely fall to fifth place among the largest steel exporters to the US at 168,000 tons. That lags behind Canada at 646,000 tons, Mexico at 239,000 tons, Japan at 193,000 tons, and Korea at 172,000 tons  — based on the license applications.

So if imports are rising, does this mean increased competition for domestic producers and lower prices for consumers in the months ahead? Not yet, as strong global demand, still rising raw material costs and capacity issues mean prices will be high for the second and third quarter at least. Read more

A mining giant is blocked from a major new investment due to a human rights group campaigning on behalf of Indian tribes. Sound like a typical story of a US minerals company being prevented from starting a major domestic project? Well, no — contrary to popular belief, it is not free reign in the developing world but restrictions at home.

This is Vedanta Resources, a major Indian metals and mining group under siege from a human rights and environmental group Survival International, reported in the Daily Telegraph.

Apparently Vedanta has been working their way through the regulatory process for several years in order to gain approval for a major new bauxite mine in Orissa State, Eastern India. The bauxite would be used for making alumina and finally aluminum, a metal that is experiencing rapidly growing demand in India in line with the rest of the economy. One of the less well reported issues of globalization is that multi nationals face similar environmental challenges all over the world now — a fact of which Vedanta is only too well aware.

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