Articles in Category: Commodities

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Happy Friday, MetalMiner readers! Here’s a look back at this week’s top stories.

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  • A number of aluminum associations around the world wrote a joint letter urging G20 leaders to hold a forum on global aluminum overcapacity at this year’s G20 Summit, scheduled to take place from Nov. 30 to Dec. 1 in Buenos Aires.
  • After a steady downward trend, LME aluminum prices recovered, rising more than 13% in a week.
  • The U.S. International Trade Commission will advise the U.S. Trade Representative on proposed modifications to the U.S. Korea Free Trade Agreement (KORUS).
  • The EU is demanding compensation at the WTO for the U.S.’s Section 232 tariffs on steel and aluminum, arguing that the tariffs were imposed to protect U.S. industry. What is behind the U.S.’s national security argument?
  • Irene Martinez Canorea’s mid-month metals analysis shows aluminum as April’s top performer so far. Prices for copper and nickel have also risen, while other base metals have fallen.
  • U.S. and India have announced a joint task force on natural gas.

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Numerous factors weigh heavily on the base metals and commodity complex: the Chinese copper scrap ban, the Section 232 proclamation on aluminum and steel combined with country-specific exemptions set to expire on May 1, the Section 301 investigation, and multiple strikes at copper and nickel mines to boot. After the turmoil of the first few months of 2018, MetalMiner reviews how base metals and commodities performed during Q1.

Aluminum, copper and nickel on the rise

Aluminum, copper and nickel prices started 2018 weaker than at the end of 2017. The end of 2017 showed a sharp rally for these base metals, following the bullish uptrend that began in the summer of 2017.

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The short-term downtrend sounded alarms as prices dropped significantly, not finding a floor. However, LME prices started to climb at the beginning of April, leaving the downtrend behind.

Read more

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This morning in metal news, Chinese iron ore futures rebound from a 10-month low, Saudi Arabia emerges as OPEC’s leading supporter for further reducing oil supply, and researchers discover a major supply of rare earth minerals in the seabed near a remote Japanese island.

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Chinese Iron Ore Rebounds from 10-Month Low

After dropping to a 10-month low on Tuesday, Chinese iron ore has rebounded somewhat, Reuters reported.

The price of iron ore had dropped nearly 15% this year as a result of oversupply, with stocks totaling 161 million tons. As the Wall Street Journal’s Rhiannon Hoyle wrote, “there’s enough iron ore sitting at Chinese ports right now to produce more than 100 million automobiles, in theory.” However, experts say that most of the iron ore is likely of low-quality.

A $100/Barrel Oil Price

Saudi Arabia wants to see the price of crude to rise to $80 to $100 per barrel. Reuters reported that these were the figures discussed by senior Saudi officials in recent closed meetings.

In January 2017, OPEC, Russia and other producers had agreed to reduce supply, a pact that extends until December 2018. Although the original goal of the pact is in sight, with oil prices currently at $73 a barrel, Saudi Arabia is emerging as the OPEC’s leading supporter for further supply cuts.

Off the Coast of Japan, a Rare Earths Find

A team of Japanese researchers recently discovered a treasure trove of rare earth minerals in the Pacific Ocean seabed near Minamitori Island, a small Japanese island about 1,150 miles from Tokyo, CNN reported. Read more

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This morning in metals news, oil and gold prices opened slightly lower despite the missile attacks on Syria that took place early Saturday morning local time. NAFTA renegotiation talks speed up in face of Mexico’s upcoming presidential election.

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Oil, Gold Traded Lower Following Syria Strikes

Oil and gold prices have not yet spiked following the missile attacks that the United States, Britain and France launched on Syria over the weekend, instead trading slightly lower when markets reopened, according to Reuters.

“Gold has benefited in recent days as a safe-haven asset amid a U.S.-China trade dispute and the escalating conflict in Syria, which also pushed oil above $70 a barrel because of concerns about a spike in Middle Eastern tensions,” Reuters’ Jan Harvey and Jessica Resnick-Ault wrote.

The LME’s Aluminum Woes

The London Metal Exchange’s decision to no longer accept aluminum from Russian producer Rusal has led to a scramble to withdraw non-Russian metal from the LME’s warehouses, the Financial Times reported. Buyers have also been in a bind to find alternative sources of aluminum. Read more

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Before we head into the weekend, let’s take a look back at the week that was and some of the stories here on MetalMiner:

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  • Joseph Kabila, president of the Democratic Republic of Congo, is looking to rip up a 2002 mining charter in order to secure a larger piece of the revenue from the country’s vast natural resources.
  • Copper prices have been trending down since a December surge (when the LME copper price reached $7,215/mt).
  • There’s a battle going on between two rival manufacturers of the famous London black cab.
  • Hong Kong’s housing market is overstretched, MetalMiner’s Stuart Burns writes.
  • In case you missed it, it’s Monthly Metals Index (MMI) Week! We kicked our off monthly round of subindex reports this week, which are available at the following links: Construction, Rare Earths, Renewables, and Automotive. Look for the remaining six MMI reports next week.
  • India is among the list of countries still lobbying for exemptions from the U.S.’s Section 232 tariffs on steel and aluminum imports.

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I guess you can’t blame countries like the Democratic Republic of Congo (DRC) for looking to acquire a bigger piece of the wealth from their own supplies of natural resources.

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The Telegraph reports that President Joseph Kabila is ripping up the 2002 mining charter, looking to boost royalties from 2% to 3.5% on base metals, with an additional levy of 10% on what it calls strategic minerals.

While at the time of writing it was not clear if copper and cobalt would be hit by the higher tax, both metals certainly come under the broad definition of strategic and are two of the DRC’s biggest earners.

Other reports suggest the premium for strategic metals could be just 5% and 6% on precious stones, of which the DRC is also a major producer.

The grab for a bigger share of royalties probably predates news that Glencore has struck a deal to sell one-third of its DRC cobalt production to Chinese battery recycler GEM Co. in a three-year deal, said in a Times article to cover 52,800 tons of cobalt hydroxide between 2018 and 2020. With cobalt prices at record levels, the deal is already worth between $4 and $5 billion (assuming prices don’t rise even further).

Needless to say, mining companies are lobbying hard for a reduction in any additional royalties, arguing for delays to implementation, and special exemptions. The government’s position is that the previous code, now some 15 years old, was created to make the DRC attractive for investors at a time when it was suffering the second Congo War from 1998-2003. The government argues that in the intervening period, the situation has become much more stable and mining companies can operate in a better domestic security environment (and therefore at lower cost and lower risk).

Under such circumstances, they suggest a fairer distribution of the spoils is overdue.

Perceptions of domestic security are relative. The DRC remains one of the most difficult places in the world to do business and there remains a significant risk premium that Western mining companies will demand to invest in that troubled country.

But the fact remains that the DRC has huge reserves of critical raw materials that will be needed in the years to come for a wide variety of technologies and applications.

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If the state takes a little more of the pie, it will probably be reflected in prices. But with limited alternatives for products like cobalt, it is unlikely to dent mining companies’ enthusiasm for investing in the DRC.

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Section 232 aside, given the market turbulence this month MetalMiner took a look back at commodities and other base metals to reassess trends.

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Commodities have traded lower in March, slowing down from their previous pace.

Crude oil prices (one of the most important price indicators in the commodities basket) increased this month, which may still lead to a higher CRB index by the end of the month.

CRB index. Source: MetalMiner analysis of Stockcharts

However, the long-term uptrend for commodities remains in place. Next month, buying organizations can expect to see price increases.

Meanwhile, this month base metals have traded lower. Contrary to rising U.S. steel prices, base metal prices began the month with price declines. Price retracement occurs as a normal trading pattern.

In a bullish market, buying organizations may want to identify the lows to reduce price risk.

DBB index. Source: MetalMiner analysis of Stockcharts

As with commodities, the base metals long-term uptrend remains in place.

While the CRB and DBB indexes have both traded lower in March, domestic steel prices skyrocketed.

With the recent tariffs imposed on steel products, steel prices remain at more than four year-highs for plate, and at 2011 levels for all the other steel forms (HRC, CRC and HDG).

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

To learn more about how Section 232 will impact both the aluminum and steel industry, check out our Section 232 special coverage.

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Earlier this month, the U.S. Department of the Interior announced that it is seeking public comment on a recently released draft list of minerals “considered critical to the economic and national security of the United States.”

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An executive order from President Trump in December directed the secretary of the interior (in coordination with other agencies) to publish a list of critical minerals in the Federal Register. As of Feb. 27, there were 102 public comments listed on the Federal Register.

“The work of the USGS (United States Geological Survey) is at the heart of our nation’s mission to reduce our vulnerability to disruptions in the supply of critical minerals,” said Dr. Tim Petty, assistant secretary of the interior for water and science, in an Interior Department release. “Any shortage of these resources constitutes a strategic vulnerability for the security and prosperity of the United States.”

The published list covers minerals used in a broad range of practical applications, from catalytic agents to batteries.

According to the Executive Order signed Dec. 20 by Trump, a critical mineral is defined according to a trio of components:

  • A non-fuel mineral or mineral material essential to the economic and national security of the U.S.
  • The mineral has a supply chain vulnerable to disruption
  • The mineral serves an essential function in the manufacturing of a product, “the absence of which would have significant consequences” for the economy and national security

According to the order, within 180 days of publication of the list of minerals, the secretary of commerce — in coordination with the secretaries of defense, the interior, agriculture and energy — will submit a report to the president that will outline, among other things, a strategy to reduce the U.S.’s reliance on critical minerals and an assessment of “progress toward developing critical minerals recycling and reprocessing technologies.”

The full list of critical minerals from the Department of the Interior, including common applications, is as follows:

  • Aluminum (bauxite), used in almost all sectors of the economy
  • Antimony, used in batteries and flame retardants
  • Arsenic, used in lumber preservatives, pesticides, and semi-conductors
  • Barite, used in cement and petroleum industries
  • Beryllium, used as an alloying agent in aerospace and defense industries
  • Bismuth, used in medical and atomic research
  • Cesium, used in research and development
  • Chromium, used primarily in stainless steel and other alloys
  • Cobalt, used in rechargeable batteries and superalloys
  • Fluorspar, used in the manufacture of aluminum, gasoline, and uranium fuel
  • Gallium, used for integrated circuits and optical devices like LEDs
  • Germanium, used for fiber optics and night vision applications
  • Graphite (natural), used for lubricants, batteries, and fuel cells
  • Hafnium, used for nuclear control rods, alloys, and high-temperature ceramics
  • Helium, used for MRIs, lifting agent, and research
  • Indium, mostly used in LCD screens
  • Lithium, used primarily for batteries
  • Magnesium, used in furnace linings for manufacturing steel and ceramics
  • Manganese, used in steelmaking
  • Niobium, used mostly in steel alloys
  • Platinum group metals, used for catalytic agents
  • Potash, primarily used as a fertilizer
  • Rare earth elements group, primarily used in batteries and electronics
  • Rhenium, used for lead-free gasoline and superalloys
  • Rubidium, used for research and development in electronics
  • Scandium, used for alloys and fuel cells
  • Strontium, used for pyrotechnics and ceramic magnets
  • Tantalum, used in electronic components, mostly capacitors
  • Tellurium, used in steelmaking and solar cells
  • Tin, used as protective coatings and alloys for steel
  • Titanium, overwhelmingly used as a white pigment or metal alloys
  • Tungsten, primarily used to make wear-resistant metals
  • Uranium, mostly used for nuclear fuel
  • Vanadium, primarily used for titanium alloys
  • Zirconium, used in the high-temperature ceramics industries

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A recent article in  Crain’s examining an alleged manpulation of the VIX, otherwise known as the Volatility Index, prompted MetalMiner to take a deeper look at the relationship between the index, commodities and industrial metals.

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As a reminder to readers, trading activity and the sentiment behind trading activity determines the movements of any exchange-traded product, from soybeans to gold to oil. Therefore, buying organizations may want to better understand the relationship between the VIX and industrial  metals.

What is VIX?

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. The VIX is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options. Traded on the CBOE, the VIX is known as the “fear gauge,” or the “fear index.”

As a measure of expected volatility, the VIX is calculated as 100 times the square root of the expected 30-day variance of the S&P 500 rate of return. Using this math, the variance is annualized and the volatility can be expressed in percentage points.

VIX and Commodities

Concerns for traders, however, started as a result of a recent spike in the VIX that drove investors toward billion-dollar losses. Before the index spiked, the VIX traded mostly sideways. The latest spike drove the VIX to 2015’s highs.

VIX (CBOE Volatility Index). Source: CBOE

The VIX and the CRB commodities index share a long-term negative correlation. A negative correlation means that when one index increases, the other tends to decrease. The opposite also holds true. Therefore, when commodities trade in an uptrend, the VIX tends to trade in a downtrend.

However, this correlation does not appear as strong as the commodities and base metals correlation (for example). The negative correlation between the CRB and the VIX indexes falls in the 0.7 to -0.7 range. The closer to +-1, the stronger the correlation. However, the 0.7 to -0.7 correlation still serves as a good indicator for buying organizations.

Commodities in black. VIX index in green. Source: MetalMiner analysis of StockCharts

The longer the time period, the stronger the correlation. Therefore, spikes and short-term movements may not affect the other index.

The recent spike in the VIX does not have a meaningful impact on the CRB index. Buying organizations may wish to use the VIX as another indicator of the commodities trend, particularly for the longer term.

VIX and Industrial Metals

Since commodities and base metals have a positive correlation (meaning that both move in the same direction), the VIX can serve as another road sign for base metal price movements (albeit in an inverse relationship).

Base metals in black. VIX index in blue. Source: MetalMiner analysis of StockCharts

The negative correlation also applies to the Industrial Metals (DBB index) and the VIX.

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However, the negative correlation appears stronger for commodities, particularly for the longer term. The chart above highlights the industrial metals and VIX index correlation as even stronger than the VIX-commodities correlation. Therefore, buying organizations will want to follow the VIX, particularly for the longer term.

India’s coal story is something that we at Metal Miner have tracked over the years. It’s no secret that of late, the world’s largest coal producer, Coal India Limited (CIL), has been facing some measure of criticism for not being able to meet certain targets.

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Now comes a document drawn up by the monolith itself which says CIL was “trailing global peers” in operating performance and technology adoption, while taxes & freight constitute 25% and 34%, respectively, of the cost consumers pay, undermining the monopoly’s competitiveness.

The document, titled “Vision 2030,” is quick to add that the cost structure of the Indian coal sector is still favorable and that cost of production is a concern for only about 10% of the output, according to the Economic Times.

CIL has pointed out that for coal transported over a distance up to 100 km, it received only 56% of the costs paid by consumers for procuring dry fuel. Taxes, duties and levies were about 34%, followed by freight at 10%. For transporting coal up to 500 km, Coal India received 41% of the total payments made by consumers while taxes, duties and levies constituted 25%, followed by railways at 34%.

CIL feels that although it produces coal at competitive rates, its own operating process was letting it down.

The report says there is a “significant gap” in productivity norms of similar class of equipment in mines in India and those around the world. For instance, similar class of shovels in international mines is operated 40-50% more hours annually than at CIL.

Coming at a time when the state-run miner reported a 4.21% increase in its consolidated net profit for the quarter ending December 2017, beating street expectations, “Vision 2030” seems like a wonderfully self-deprecating piece of writing and self-actualization.

Production during the quarter stood at 152.04 MT, up from 147.73 MT in the same period the previous year. The one thing that seems to have worked in its favor was earnings from e-auctions, although fuel supply agreement (FSA) realizations were a drag.

This is all very fine, but the vexed problem of not enough coal reaching many of India’s power plants remains.

An assurance by Indian Coal and Railways Minister Piyush Goyal that the thermal power plants’ demand for coal will be met by adequate supplies in the next financial year is supposed to suffice for now. The Power Ministry has demanded 615 MT of coal and 288 rakes for thermal power plants in the next financial year. As of February 11, there were 52 thermal units that had less than seven days of coal stocks, according to data from the Central Electricity Authority.

The minister’s optimism stems from the fact that they would receive speedier environmental clearances for expanding coal mines in India. The Union Government is said to be tackling low coal stocks in over 50 power plants in the country.

To be fair to CIL, the recent emergence of renewable energy as a viable key substitute, and the promises made under the Paris Agreement have eaten into its revenue. Imported coal as a viable substitute is another challenge the company faces. Incidentally, one of the stipulated aims of CIL’s Vision 2030 was to assess the future demand scenario for the coal sector in India up to 2030.

While talking about emergence of renewable energy as a key substitute for coal, the study specifically delves into the massive growth of the Indian solar sector in last two years.

The total capacity addition in solar over the last two years has been more than 8 GW, an increase of approximately 200% in the installed capacity. “Efficient use of materials, improved manufacturing process, improvement in cell efficiency, and decrease in prices of solar inverters and other ancillary parts in the electrical system are expected to continue driving the competitiveness of solar,” the study noted.

The study estimates that the regulatory framework for access and extraction of coal will continue getting stricter, leading to increases in the cost of compliance. In 2015, India migrated to auction as a mechanism for allocation of coal resources for extraction.

About 50% of CIL’s total production comes from 15 opencast mines with a total production of 279 MTPA (million tons per annum). Remaining 452 CIL mines produce only 274 MTPA, or approximately 0.60 MTPA per mine.

India’s coal sector is regulated at several levels with the central government, provincial governments and various local agencies involved in supervising the industry.

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Much of what CIL said in its report is true. Power utilities in India are said to be already scouting abroad for coal mines, with some having met with success.

In fact, on a recent visit, Poland’s Deputy Minister Marek Magierowski said his country’s expertise in mining, especially in coal, could help boost collaboration with India. Magierowski, who was in India for the Bangla Business Conference and the Raisina Dialogue, spoke about bilateral relations, Europe’s Russia problem and Poland’s Europe problem. The Minister also pointed out that for both nations, coal would remain important to their energy needs “despite the problems posed by regulations that have to comply with climate change.”