Articles in Category: Commodities

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It’s been great going for India’s state-owned National Aluminium Company (NALCO). Its revenues in sale of alumina are up by 30% year-over-year and it has reported a 94% jump in net profit.

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The company has now lined up some new projects.

According to reports, NALCO is said to be contemplating a high-end aluminum products plant by availing technology from foreign suppliers. The project is intended to provide for future applications of aluminum in bullet trains, aerospace and electric vehicles, all three of which are coming to India.

T.K. Chand, NALCO’s chairman and managing director, was quoted as saying that the technology for high end aluminum products plants was not available in India, so Nalco was in talks with potential suppliers in the U.S. and Russia to avail their technologies. The company had already floated an Expression of Interest (EoI) to select the technology supplier.

If successful, the proposed plant is likely to come up within the aluminum park at Angul in Odisha province.

Earlier this month, the aluminum major inaugurated three major projects at a total cost of about U.S. $94 million (Rs 660 crore). One was a bauxite mine, the second a 18.5 MW power unit at alumina refinery, Damanjodi and a nanotechnology-based defluoridation plant at Angul.

The aluminum park that Chand referred to was being developed jointly by NALCO and state-owned Odisha Industrial Infrastructure Development Corporation.

NALCO has signed a memorandum of understanding (MOU) with the Indian Defense Ministry Public Sector Unit Mishra Dhatu Nigam Ltd for the manufacture of high-end aluminum alloys.

Aluminum is not only in the weapons and aerospace sector but also in vehicles (especially electric vehicles).

In an interview with The Economic Times recently, Nalco’s CMD spoke of his plans to make the company a  1-million-ton aluminum player by 2020. He said NALCO’s capacity today was at 4.6 lakh ton, of which, this year, it would be producing around 4.2 lakh (420,000) tons. In 2018-2019, the company planned to ramp up production to 4.6 lakh (460,000) tons. The addition of a new smelter would take it to over 1 million tons for aluminum.

When asked for the reason behind NALCO’s alumina sales volume jumping by 30% year on year, Chand replied that the increase in revenue, particularly in alumina, came because of change in NALCO’s strategy. Earlier, the company would sign a long-term agreement for sale of alumina in the international markets, but it did not give much benefit in case of a rising market. Thereafter, with the market price going up, it had switched strategy of spot tenders. This was what led to the prices increasing from U.S. $280 to as high as $527.

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Growth in volume was also achieved since NALCO was able to achieve a 100% capacity utilization of aluminum refinery.

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Amongst a plethora of news, comment and opinion, it is often like struggling through a jungle when trying to get clarity on the commodities landscape. Sometimes, there is almost too much information.

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So, an analysis in the Financial Times entitled “Five things to watch as Brent crude oil nears $70” makes a refreshingly simplified but no less comprehensive summary of the key issues currently driving the oil price.

The crude oil price rise has been relentlessly rising for the last 3-4 months and while plenty of opinion has been espoused — in these columns too, I should add — about the moderating effect of U.S. shale oil on global supply (and hence, prices), the reality is so far the impact has been minimal. Prices have continued to show stubborn resistance to any such moderation.

Iran has certainly been a factor. Opinions differ as to how much impact unrest in the region has contributed to price rises. However, as the third-largest oil producer in OPEC, contributing to some 4% of global supply, civil unrest was a reminder that nothing can be taken for granted.

In practice, protests had no impact on oil output. The street protests have now subsided, but Iran remains a source of tension in the region, with an antagonistic stance towards Saudi Arabia with respect to its military intervention in Yemen providing the potential for a flare-up. Oil output in the region generally has suffered some setbacks, with output in Kurdistan dropping after Baghdad took back control of disputed oilfields in October.

Output elsewhere has remained restrained in those countries participating in the Saudi-Russian led coalition to reduce inventories, but question marks remain as to how well they will stick to the deal as the oil price remains firm in 2018. Many may believe the heavy lifting is done and treasuries now deserve replenishing.

Not so fortunate to have a choice is Venezuela, which is quietly imploding.

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President Trump is not unused to controversy — some say he even courts it.

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So, a recent proposal following an executive order signed last April to widen energy exploration should come as no surprise.

The draft Five-year Outer Continental Shelf Oil and Gas Leasing Program has been enthusiastically welcomed by the oil and gas industry but vociferously opposed by a cross-party coalition of governors, lawmakers, environmental groups and the military.

The proposal is to open up 25 out of 26 regions of the outer continental shelf in which oil and gas exploration had been banned by former President Barack Obama near the end of his term. The ban blocked drilling about 94% of the outer continental shelf, but the Department of the Interior said the new proposal would open up 25/26 regions on the Eastern seaboard, the Californian coast, the Gulf of Mexico and in the Arctic.

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This morning in metals, a major player in domestic steel announced when its full-year earnings call will drop, China looks to be giving used cars some love, and Australia’s government appears a bit bearish on iron ore in the next couple years.

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Iron Ore Price Forecast for 2018-2019

Australia’s Department of Industry, Innovation and Science noted in recent commodities report that it expects iron ore prices to drop 20% in 2018 over this past year’s level, and continue that trend into 2019, according to Reuters.

A demand slowdown in China is much to blame, according to the department’s resource and energy analyst David Thurtell, as quoted by the news agency.

China Pivots to Used Cars

Speaking of demand slowdowns, China’s consumers may also be to blame for current — and future — automotive metals demand in Asia (and globally).

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Before we come to the end of the first business week of 2018, let’s look back at some of the stories on MetalMiner so far this year:

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  • Chinese supply-side reforms generally have a big impact on metal prices — such was the case for copper, as our Stuart Burns wrote early this week.
  • In case you missed it, the fourth episode of our podcast series, Manufacturing Trade Policy Confidential, dropped this week. This time, we spoke with Heidi Brock, CEO of the Aluminum Association.
  • With 2018 just under way, many publications are making predictions for the year with respect to the markets and how they will perform (among other things). Burns rounded up some of the predictions being made for the year, ranging from the political to the economic.
  • After a solid 2017, Tata Steel has big plans for 2018, Sohrab Darabshaw writes.
  • Speaking of supply-side actions, Burns touched on oil output cuts led by OPEC.
  • We kicked off our monthly round of Monthly Metals Index (MMI) posts with the Automotive MMI.
  • Gold and Bitcoin, in terms of finance, sit on opposite ends of the spectrum, with the former representing tradition and the latter representing the rise of modern cryptocurrencies. However, their relative fortunes are more connected than you might think, Burns writes.
  • For our second MMI post, we surveyed the month in construction trends and prices.

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Gold has defied interest rate rises and record equity markets to rally to its highest level in more than three months, the Financial Times reported this week.

Rising more than 6% since early December to over $1,300/ounce — its highest level, the paper reports, since September 2015.

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Gold is normally considered a safe-haven asset and a store of wealth in times of financial stress and uncertainty. So, why the surge in demand?

Performance of the U.S. Dollar

The U.S. and Europe are both expanding and emerging market growth is set to top 5% this year. One theory is the weakness of the U.S. dollar — as the dollar falls, all commodities priced in the currency become relatively cheaper and therefore more attractive to buyers in other currencies.

The dollar has been the worst performer of the G10 currencies in 2017, falling some 10% over the year. Investors also have expectations of higher inflation in the U.S. due to President Donald Trump’s tax reforms and a rising oil price, which often stokes inflation is seen by some as a risk. But while the dollar is attributed with the majority of the rise in gold, it may not be the whole story.

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After hitting a low of below $43/barrel in mid-2017, the oil price has risen inexorably to its highest level since 2015, according to the Financial Times. Rising some 35% since July, Brent crude hit over $67/barrel as hedge funds heap long positions despite the market, by most accounts, still being in surplus.

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Source: MacroTrends.com

OPEC’s alliance with Russia and a few other non-OPEC producers has certainly restricted supply (and the market is tighter as a result). However, the U.S. Energy Information Administration forecast in December that U.S. oil production would rise by 780,000 barrels a day in 2018, as prices continue to increase.

But for the first time in several years, the talk is more about demand and geopolitical risk than about excess supply.

Venezuela is rapidly imploding with output from the world’s second largest proven oil reserves failing steadily. Iranian unrest has added further anxiety for fear the protests could continue and possibly begin to impact output. Meanwhile, one-off crises like cracks found in a major North Sea pipeline and a fire in Austria have added a sense of vulnerability to the market that wasn’t there just a few months ago.

“Geopolitical risks are clearly back on the crude oil agenda after having been absent almost entirely since the oil market ran into a surplus in the second half of 2014,” the FT quotes Bjarne Schieldrop, chief commodities analyst at SEB.

Meanwhile, though, the elephant in the room is stirring.

U.S. shale production is on the rise and U.S. exports are also increasing sharply, offering the potential to undermine global markets. Platts estimates in its December 2017 Insight report U.S. crude exports could average 2 million b/d by 2019, having already nearly breached this figure in late September. The capacity is in place to export 3 million b/d now and will be closer to 4 million b/d during 2018, Platts reports.

Source Platts

Nor is rising supply from U.S. shale the only source of supply-side excess.

New projects in Brazil and Canada could add as much as rising U.S. exports matching rising global demand and leaving the market at best in a balanced state. For now, the bulls have the market by the horns — to muddle my metaphors — but 2018 will see a fascinating tussle between OPEC-led cutbacks and growing supply from the Americas.

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On the plus side, strong global growth, both among mature and emerging markets, is lifting demand. For the time being, the bulls are in the ascendancy and it would be a brave wager to bet against them in the short term.

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Last week, the Fed hiked interest rates by 0.25%. Most expected the hike following June’s announcement of a likely increase. The hike should not impact markets in any major way.

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Along with the rate hike, the Fed also revealed a modified forecast for U.S. domestic growth for 2018. The forecast calls for 2.5% growth, up from the previous forecast of 2.1%. Tax reform could help support the growth forecast.

The U.S. Dollar

The U.S. dollar remains in a long-term downtrend since the beginning of the year. The two latest Fed rate hikes (circled in orange below) resulted in a slight increase of the U.S. dollar. However, the prior hikes failed to support any kind of dollar rally.

Source: MetalMiner analysis of Trading Economics

The U.S. dollar traded sideways during the last quarter of 2017. From here, the U.S. dollar could either change trend or continue falling.

Current indicators suggest that the long-term trend appears stronger and the U.S. dollar weakness looks to continue, as it has failed to breach prior resistance levels. However, buying organizations will want to watch the U.S. dollar closely.

The CRB and DBB Indexes

Commodities and industrial metals usually trade inversely to the U.S. dollar; both remain in an uptrend.

The CRB index has breached our own resistance levels several times since summer. Oil prices, which account for a significant portion of the CRB mix, are the cause of the index’s rise.

Source: MetalMiner analysis of Trading Economics

This month, the CRB index fell after breaching previous levels. The small drop came as a result of  a higher U.S. dollar this month (commodities and the dollar historically correlate negatively). In bullish markets, these represent typical price movements.

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The DBB industrial metal index also appears to be in an uptrend this month, driven by the increase in base metal prices and a stronger steel industry. Therefore, buying organizations could expect price movements to the upside.

Before we head into the weekend, let’s take one last look back at the week that was:

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Free Download: The December 2017 MMI Report

Liquefied natural gas . donvictori0/Adobe Stock

Natural gas has long been promoted as a less-polluting alternative to coal and less-costly alternative to nuclear power.

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Its green credentials are not whiter than white, but relative to coal, modern combined cycle gas turbine power plants (CCGT) are highly efficient, emit low levels of pollution and crucially can be turned on and off quickly to provide intermittent or peak power demands, in addition to balancing more variable sources (such as renewables).

The Non-Nuclear Option?

After Fukushima, many major economies have moved away from nuclear.

In addition to Japan’s near complete shutdown of its nuclear generating capacity, Germany followed suit. Even France, long a champion of nuclear power, has said less of its generating capacity will be met by nuclear in the future.

The expectation was that natural gas would be the natural successor to nuclear power, as countries took an increasingly responsible view to reducing carbon emissions. But despite a surge of investment in natural gas liquefaction facilities and the construction of new liquefied natural gas (LNG) carriers, the growth in LNG consumption has been much lower than expected.

LNG Demand Drops in Europe

In fact, some markets are going backwards, the FT reports.

Natural gas demand in Europe is 12% lower than it was 10 years ago. Chinese and Indian demand continues to grow, but the dramatic gains by solar power and wind, where costs have fallen 85% since 2009, have severely limited the prospects for natural gas as a power source.

Indeed, India’s entrenched coal industry and coal-based electricity generating capacity means its future is likely to be predominantly solar and coal — not natural gas at all.

China, like Europe, has adopted renewable power (particularly wind) on the basis of cost, as costs have tumbled for both solar and wind (again, particularly wind) to below the cost of natural gas.

As new supply-side capacity comes onstream, the market for natural gas has shifted from long-term contracts signed prior to new LNG facilities even being started to a competitive spot market; yet even here, prices are not low enough to spur a significant switch from renewables investment to gas.

Only in the U.S., where shale gas prices are low, has natural gas consumption risen significantly. However, even that is more geared toward chemicals feedstock and to supply exports rather than to meet rising demand due to power generation.

Looking Ahead

The future, at least over the next few years, is not any rosier for gas producers.

U.S. production is rising, Russia is opening up new resources in the north and is looking to export more, projects in Australia have created a major competitor to Qatar and Middle Eastern suppliers. Meanwhile, the world’s second-largest reserves in Iran are waiting for investment to bring them to market. The Financial Times suggests new finds in the eastern Mediterranean by Israel, Egypt, and off East Africa may never see sufficient investment to develop liquefaction and export, and are destined only for local consumption.

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This is not exactly music to the ears of aluminum producers for whom LNG liquefaction and regasification plants and the construction of LNG carriers has been a particularly profitable niche industry over the last decade. LNG gas codes call for controlled chemistry and manufacture that has created a higher value add industry for more sophisticated and capable producers.