Articles in Category: Commodities

Regular readers of The Telegraph, arguably Britain’s only remaining decent broadsheet paper, will be familiar with the writings of Ambrose Evans Prichard, the international business editor.

It has to be said that he has a slightly sensationalist reporting style, but his articles are always liberally supported with facts and figures. Even though he seems to argue more often than not that markets about to drop off the edge of a cliff, he has, at times, been right. Yet an article this week titled “Commodities slump on China tremors and OPEC failure,” while making a plausible argument based on the facts and figures presented, could equally have an alternate explanation if one looks over a slightly longer timeframe.

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Clyde Russel of Reuters takes just such an approach in an article posted just a day or so later, which all goes to underline the challenge for buyers in interpreting fundamental supply and demand data and extrapolating workable strategies.

Source: The Telegraph

The Telegraph looks at a gradually sinking Brent oil price coupled with falling Chinese crude oil imports, and it suggests that the former is in part a result of the latter. Reuters looks at the same data, and whilst the article acknowledges that imports are down in April, it goes on to look at the last 12 months trend line.

Reuters notes that in the first four months of 2017, crude oil imports were up 12.5% from the same period last year to around 8.46 million bpd. The article goes on to point out that this is also substantially higher than the 7.6 million bpd imports averaged for 2016, suggesting that China’s appetite for crude has jumped substantially so far this year, notwithstanding the pullback in April. Read more

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Now’s the time to buy those solar panels you’ve been saving up for. This week, Tesla announced that it is taking orders and deposits for solar roof tiles that look stunningly like… regular roof tiles. But therein lies the appeal, and the $42-per-square-foot cost isn’t so bad either, lower than what industry analysts expected, Bloomberg reported.

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This growing interest in solar energy has been supporting the demand for silver, according to the Silver Institute’s World Silver Survey 2017, which Taras Berezowsky covered on MetalMiner this week. As Berezowsky wrote, “According to the report, silver demand for photovoltaic applications shot up 34% to reach 76.6 million ounces. This growth was the strongest since 2010, and it was driven by a 49% increase in global solar panel installations.”

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In addition, “automotive will be an interesting sector to watch,” Berezowsky wrote. Silver demand could be driven up further as the world moves towards electric vehicles — whose engines and circuit boards require silver — however slowly, as Stuart Burns noted earlier this morning.

Bearish Times

“If you are a metal buyer, it doesn’t matter if you buy aluminum, copper, steel or tin,” Raul de Frutos wrote in his commodities outlook this week. “The information in this article is important for you.” Commodities may have enjoyed a bull market in early 2016, but things appear to have shifted to the bear-ish. “Commodities not only have struggled to make new headway,” de Frutos wrote. “In the past few days they have weakened significantly. Recent moves in China have caused a significant shift of sentiment in financial markets.” Read more

Commodities gave important signals in April/May. The performance of commodity markets has a heavy impact on the price movements on any industrial metal. If you are a metal buyer, it doesn’t matter if you buy aluminum, copper, steel or tin. The information in this article is important for you.

Reuters/Jefferies CRB commodity index. Source: MetalMiner analysis of stockcharts.com

About a month ago I noted that while industrial metals were on the rise, commodities were range-bound, a sign of sluggish global demand. As I had written, “a healthy bull market in base metals should be accompanied by a bull market in other commodity markets.” Commodities not only have struggled to make new headway but in the past few days they weakened significantly. Recent moves in China have caused a significant shift of sentiment in financial markets.

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China Curbs on Credit

Interest rates in China have risen to the highest level in two years amid the country’s tough talks on curbing credit. China is putting on the brakes on credit growth, and the effects of those policies are already starting to be felt. As the Financial Times reported, “China Vanke, one of China’s biggest property developers, was [recently] forced to drop a bond sale… blaming changes in market conditions.”

The noticeable tightening in Chinese monetary policy is bad news for its property markets. The country has also pledged to halt risky local funding for the construction of infrastructure projects. Investors know that this will hurt demand for commodities and industrial metals. Read more

Our Stainless MMI took another dip in April, amid a broad sell-off in industrial metals. In addition, at the beginning of May, the Philippine parliament rejected Regina Lopez’s bid to be appointedas environmental minister. In a matter of weeks, nickel’s story has shifted from a clear supply shortfall to a rather complex narrative, ruining nickel bulls’ party.

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Nickel prices on the LME fell by 5% in the next two days after the news.

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Industrial metals for the most part fell in April, but that wasn’t the case for aluminum. The lightweight metal outperformed its peers as aluminum is expected to be the next target of supply-side reform in China, according to Goldman Sachs.

The New Steel?

While China tries to transition from a manufacturing economy to a service-driven one, it is aiming to cut industrial overcapacity due to environmental problems. China previously indicated its strong intentions to implement supply-side reforms in the steel industry. As a result, steel prices in China rose by 70% in less than a year.

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China’s energy intensive aluminum smelters receive nearly 90% of their energy needs from coal. In addition, China has received a lot of international pressure to reduce its aluminum capacity. For these reasons, aluminum could be the new steel this year.

To start, China announced in late February that it would cut as much as 30% of its aluminum production over the winter months. As my colleague Stuart Burns put it, “Beijing has shown solid intent in this direction, already denying planning approval to 2 million tons of new capacity in China’s northwest province of Xinjiang and clamping down hard on plants elsewhere that it deems to be failing environmental standards.” In addition, industry watchers believe that this might just be the beginning as more closures are expected to come in heavily industrialized provinces.

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Few metals have as controversial a supply side as tin. Cobalt also springs to mind, largely due to the relative importance of the Democratic Republic of Congo as a supply source. But tin likewise seems to come from areas prone to military unrest, where illegal mining of the ore provides an opportunity to fund said unrest. Even in established producing countries like Indonesia, supply is hampered by extensive illegal mining, and the authorities have been engaged in a long running struggle to control illegal mining, principally to avoid environmental damage that occurs at unregulated mines.

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Tin has benefitted from a broader commodity rebound this year. Prices are rising and LME inventory is falling as demand from the electronics industry, particularly in China, remains solid. However, one of the key supply-side variables is Myanmar, China’s new source of supply. As the graph below from Thomson Reuters shows, Myanmar is the only significant global source that has been on the rise in recent years. All others by and large have remained static or fallen.

Source: Thomson Reuters

Indonesia has the potential to export more concentrate. Its drive to control illegal mining and encourage greater domestic value-added refining has limited export volumes in recent years, encouraging China to increase imports from neighbouring Myanmar.

Reuters reports that almost all Chinese tin ore and concentrate imports now come from Myanmar, following the 2013 discovery of high grade reserves at Man Maw in northeast Myanmar. Annual production is now estimated at about 33,000 tons of tin concentrate, which Reuters reports is more than 10% of the metal’s global output. Read more

This morning in metals news, we’ve seen prices for copper and gold reach three-week highs and lows, respectively.

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Threat of Supply Disruption Has Driven Up Copper Prices

Copper prices reached a three-week high today, Reuters reported, driven by potential supply disruptions. This news comes after yesterday’s rally near the Grasberg copper mine in Indonesia. Thousands of workers from the Indonesian unit of Freeport McMoRan Inc. took part, protesting against layoffs that resulted from the company’s contract dispute with the government.

Freeport had laid off 10% of its workforce, with potentially more layoffs to come. As a response, the union representing the workers has threatened to strike for the month of May.

A Three-Week Low for Gold Prices

In contrast, gold prices fell on Monday as the threat of a U.S. government shutdown faded and the U.S. dollar edged slightly higher. The metal has dropped to $1,255.50 per ounce, the lowest gold prices have been since April 10, according to FactSet data. Political tensions in Europe had kept gold prices up so far this year, but that trend seems to have been reversed.

In related news, S&P Global Platts reported that gold production in China, the world’s top gold producer as well as consumer, fell significantly in Q1 2017. In this past quarter, China produced 101.2 tons of gold, which is a 9.3% drop compared with 111.6 tons in Q1 2016.

Bernanke Argues in Favor of a Border Adjustment Tax

Former Federal Reserve Chair Ben Bernanke came out in support of the proposed border adjustment tax (BAT), suggesting to CNBC that the GOP had not presented the idea well. Bernanke argued that a stronger dollar would negate any negative effects of the BAT – which would tax imports and exempt exports – by increasing U.S. companies’ purchasing power and lowering the cost of overseas manufacturing.

In preparing our new Monthly Metal Buying Outlook for May, we’ve seen that prices in both industrial metal markets and commodity markets have fallen over the past month.

What’s the deal?

Well, a few things are happening that stirred up that pot:

  • The U.S. dollar fell to a five-month low. The dollar’s movement usually has an inverse relationship with that of commodity prices, but not lately. Election season across the pond in France is heating up, and the outcome of the first round of presidential voting had eased concerns about the future of the euro, which rose against the dollar.
  • Interestingly, China’s annual GDP growth increased to 6.9% during Q1 2017, the fastest growth rate since the second half of 2015. Not only that, but the country also announced that it will build a “new megacity” — two things that would usually portend higher industrial metals prices. And yet…here’s what China’s economy has been doing since 2012 (the overall trend is pretty clear):

  • President Trump ordered two investigations, one for steel and one for aluminum, into whether imports of those metals threaten U.S. national security.

Check out how these types of events and trends are affecting six non-ferrous metal markets and four specific forms of steel — HRC, CRC, HDG and plate — in our detailed monthly analysis.

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India’s steel story continues to shine. The country’s consumption of finished steel goods is expected to grow by 6.1% in 2017 compared with 2016.

According to the World Steel Association (WSA), India’s steel product demand could reach 88.6 million tons in 2017, up from 83.5 million tons in 2016. WSA was also quite positive on India’s steel demand in 2018, projecting a growth of 7.1% to 94.9 million tons.

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Steel consumption in India’s neighboring country China, however, would remain flat in 2017. The WSA estimated a 2% slump in demand for 2018.

The Indian Steel Association, too, has said publicly that the country was well on its way to becoming the second largest consumer of steel, beating the United States to the second spot.

The WSA said in its report that the U.S. was expected to continue to lead the growth in the developed work in 2017-18, based on strong fundamentals, newly announced measures related to fiscal stimuli, and rising infrastructure spending. It has estimated that steel demand in the U.S. will grow by 3% in 2017 to 94.3 million tons and then by 2.9% in 2018 to 97.1 million tons.

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In India, in a further fillip to steel production, the government was contemplating making the use of Indian steel compulsory in all government or public sector funded projects. This would raise the per-capita consumption from 61 kilograms (134.5 pounds) to 160 kilograms (353 pounds) and increase production from 120 million ton to 300 million ton by 2030. The indication of this was recently given by Union Minister for Steel Chaudhary Birender Singh.

After reviewing the performance of Rashtriya Ispat Nigam Limited (RINL), the minister told reporters that “stringent measures” like imposing anti-dumping duty and minimum import price (MIP) had led to imports falling by 39% and exports increasing by 57%.

He added that the India’s national policy on steel would be unveiled soon, after receiving approval of the Union Cabinet.

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The move to make use of “Make in India” steel mandatory by government bodies comes in the wake of the central government’s commitment to support the domestic steel sector, which has been incurring losses during the last couple of years due to excess production and dumping of steel products from China into India.

Incidentally, India was aiming for a steel production capacity of 300 million tons by 2030, while the current capacity is 120 million tons and production was 90 million tons.

Gold bears have had quite a ride since the start of this year. The price spiked to $1,286 per ounce last week, a rise of 11% since the end of last year as this chart courtesy of the Financial Times shows.

Gold in 2017

Source: Financial Times

Despite a gradually improving global economic picture, geopolitical tensions have increased in recent months first with Syria and more recently with President Donald Trump’s announcement that he was prepared to take military action in North Korea.

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In Europe, investors looking to protect themselves against the political risk associated with the first round of the French presidential elections where the fear of a shock victory by the far right leader Marine Le Pen was considered a distinct possibility. During this same period, the U.S. dollar has weakened somewhat in value and with gold inversely correlated to the currency, as the dollar falls gold, and other commodity prices, rise.

Well, what a difference a week makes. North Korea has shown itself to be less capable and in the face of a tougher stance from America, less belligerent than during previous bouts of posturing.

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In the French elections, the least bad option, Emmanuel Macron, has emerged victorious from the first round over Marine Le Pen with nearly all observers expecting he will win through in the second round of voting on May 7. Later this week we should hear President Trump’s tax policies which are widely expected to include substantial reductions in personal and corporate tax rates. On the back of solid U.S. and global economic growth, such inflationary fiscal stimulus will only hasten further U.S. Federal Reserve rate increases. Not surprisingly, Goldman Sachs is not alone in predicting further weakness in the gold price, which weakened promptly on the news of the French elections and is targeted by Goldman to fall to $1,200 per ounce this summer. While not a universal truth, Goldman Sachs predictions do tend do have an element of being self-fulfilling simply because so many investors take their advice into consideration when making investment decisions.

Gold Bears

These gold bears haven’t had as big a run as their metals brethren. Source: Haribo

Of course, there remain counter arguments as to why the gold price may yet rise. Trump’s presidential decrees are easier to make than getting legislature onto the statute book. Proclamations this week over the tax reduction will likely meet a more favorable Republican response than there was the case with healthcare but, even so, may be much delayed or watered-down before having any impact on the economy.

Likewise, U.S. growth could slow reducing the impetus for the Fed to deliver on its three expected rate increases this year. The Fed has frequently undershot rate rise expectations over recent years. Finally, our friend in Pyongyang has the ability, and no doubt inclination, to still do something stupid despite pressure being brought to bear to back down by his Chinese bankers. On balance, though, gold bears have probably had as good run this year as they are likely to get and profit-taking is now inevitable for all but long-term holders of the yellow metal.