Articles in Category: Commodities

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).

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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.”

Liquefied natural gas. donvictori0/Adobe Stock

With major new projects coming onstream in Australia and the rising output from the U.S. shale producers, the global liquefied natural gas (LNG) market was widely predicted to enter a period of oversupply between 2015-2020, with total supplies growing almost 50%.

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But somewhat to everyone’s surprise, or delight if the tone of Royal Dutch Shell chief executive Ben Van Beurden is anything to judge by, “The LNG glut — conspicuously absent isn’t it?” he is quoted as saying in the Financial Times, a glut has failed to develop.

Rather than fall, LNG prices have remained robustly firm despite the predicted flood of new supply entering the market. The reason? The other side of the supply-demand equation has been outdoing itself.

Rising imports by China has been driving growth, pushing Asian prices above $11 per million British thermal units — a three-year high, reports say.

China raised its imports of the fuel by 50% last year to around 38 million metric tons, according to the Financial Times, after Beijing strengthened measures designed to control pollution from coal use, overtaking South Korea as the second-biggest importer globally, behind only Japan.

The Financial Times goes on to report that Pakistan, Egypt, Jordan and a host of other countries, including in Latin America and Europe, have also become buyers. Some, like Egypt, have faced temporary fuel supply problems at home. Others, like Lithuania, have been pleased to show they have an alternative to Russian pipeline supplies. As far as the U.S. industry is concerned, Mexico, Brazil and Argentina have taken a large proportion of U.S. LNG exports since they started up on the Gulf Coast two years ago.

But the U.S. has also been successful in developing a new kind of buyer.

Traditionally, LNG is sold on long-term contracts, directly to consumers. However, U.S. energy groups like Cheniere Energy have signed long-term supply deals with traders like Trafigura, who have joined other firms like Vitol, Glencore and Gunvor in securing long-term supply deals but developing a spot market for sales. The market as a whole benefits from the greater liquidity and price discovery that comes from a more active spot market; buyers benefit from having more supply options, particularly in the face of disruptions to their long-term supply contracts.

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The LNG market is evolving and maturing as the fuel replaces less environmentally friendly alternatives like coal and competes head on with nuclear on price. The strength of LNG demand is coming at a time of unprecedented rollout of renewable energy generation, which suggests LNG will have a long-term future as part of the energy mix in the next decade despite the uptake of wind and solar.

gui yong nian/Adobe Stock

This morning in metals news, China is aiming to meet its 2020 goal for steel capacity cuts this year, a new bottle technology makes aluminum bottles feel like plastic and copper output in the Democratic Republic of Congo rose significantly in 2017.

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Chinese Government Looks to Hit Capacity Cuts Two Years Early

The Chinese government plans to reach its previously set 2020 goals for steel capacity reduction this year, Reuters reported.

According to the report, the government plan called for the reduction of 150 million tons of steel capacity by 2020.

An Aluminum Bottle that Feels Like Plastic?

According to a report in Packaging World, one company has been working on a bottle innovation for about a decade that will produce aluminum bottles with the feel of plastic.

Betty Jean Pilon, president of Montebello Packaging, explained the company’s Ushape blow-molded bottle technology during The Packaging Conference, held Feb. 5-7 in Orlando, Florida.

“We know that Canada, the United States, China, and Brazil are the largest beverage markets in the world,” Pilon was quoted as saying. “They singlehandedly produce 100 billion bottles each year. The Europeans consume about 63 billion, the South Americans about 32 billion, and the rest of the world, approximately 20 billion. So that’s why we got into it.”

Congo Copper Output Up 6.9% in 2017

Copper output in the Democratic Republic of Congo shot up 6.9% in 2017, Reuters reported.

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The country produced 1.09 million tons of copper last year, according to the report, while its cobalt output rose 15.5% to 73,940 tons.

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Metals have suffered considerable volatility this month with prices sliding, then recovering, then sliding again at the end of last week. Metals markets are not alone in this — equities have been on a slide and many are beginning to ask if this is the end of the bull market that has stretched back nearly nine years.

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It is a bull market that has seen a convergence of rising commodities prices and rising equities, laying waste to the previous case that investments in commodities is a counter-cyclical move to equities.

A few harbingers of doom have been calling for an end to the equities run for months, if not the last couple of years, caused it has been variously expected by rising interest rates, a collapse in the Chinese property or debt markets, the implosion of the E.U. or another southern European state’s debt crisis – the list goes on.

What finally seems to have spooked the market – and we are not calling an end to the bull run, as this could well prove to be a correction – is inflation.

Reuters reported last week that U.S. job growth surged in January and wages increased further, recording their largest annual gain in more than 8 1/2 years. This has led to expectations that inflation will rise this year as the labor market hits full employment, Reuters reports.

Average hourly earnings have risen to 2.9%, the largest rise since June 2009, from 2.7% in December. The robust U.S. employment report underscored the strong global demand, and raised the fear that with employment low inflation could resurface. The hot labor market will add pressure on the Fed to raise rates faster and earlier than previously anticipated, increasing borrowing costs not just in the U.S. but globally. Rising rates means a stronger dollar, as investment funds flow back into the U.S. to seek higher returns. A stronger dollar also means lower commodity prices – the two invariably move in opposite directions, as we have frequently observed before.

But John Authers, speaking in the Financial Times, refines the argument, saying the selloff came as the market feared massive bets placed on a low level of volatility, on the assumption the status quo would continue through 2018, were undermined by the rate rise scenario, and that those bets will turn into massive losses, not just for the speculators but the banks providing finance behind them. The biggest selloff since 2011 and the second-highest volumes this decade suggest auto trades kicked in as the market fell exiting positons and shorting the market. Authers states the Vix volatility index hit 37.32 on Monday, its highest level since the Chinese currency devaluation of August 2015. That exceeded the levels reached during the Greek debt crisis of 2015 and after the 2016 Brexit referendum.

Nor does he expect volatility to now subside. Markets are twitchy and while there is plenty of liquidity ready to step in and buy on the dip, this will only add to significant swings up and down.

Markets’ next crunch point will the new Fed chairman Jerome Powell’s March rate review to see the degree of hawkishness the market can expect from the new administration.

Meanwhile, commodities in general will experience complex dynamics. A stronger dollar will undermine prices and contributed in part to falls in the price of crude and gold last week, but robust global demand and rising global GDP will be supportive of metals prices, particularly for supply-constrained markets like lead and nickel.

In fact, so tight is the lead market that treatment and refining charges in China are said to have fallen to zero this month as smelters fight to secure supplies.

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Volatility, therefore, appears to be the order of the day. Consumers looking to cover positions should look to buy on dips until trends reassert themselves or a new direction becomes clear.

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This morning in metals news, Rusal saw its fourth quarter 2017 aluminum production rise, commodities generally escaped the brunt of Monday’s market plummet and European steel demand is set to rise in 2018.

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Rusal Aluminum Production Jumps

According to Platts, Rusal’s Q4 2017 aluminum production rose 1.5% year over year.

Rusal’s production was up 1.4% from its third quarter total.

Commodities Avoid Fallout from Monday Meltdown

Despite the historic Dow market drop on Monday, commodities made it through relatively unscathed on account of strong demand, Bloomberg reported.

European Steel Growth to Rise in 2018

According to the European steel association Eurofer, Europe’s steel sector will see increased growth this year but also will be threatened by imports, Reuters reported.

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According to the report, apparent steel consumption in the European Union is expected to increase by 1.9% this year.

Coca Cola’s new lineup of Diet Coke flavors. Source: The Coca-Cola Company Image Library

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

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