Articles in Category: Commodities

Big news in US steel and mining circles yesterday. Cleveland-Cliffs, the largest North American iron ore pellet producer to the steel industry, agreed to acquire Alpha Natural Resources, with 60 coal mines, for almost $10b in a cash and stock deal according to numerous sources. The combined entity to be named Cliffs Natural Resources, expects to sell more than 30 million tons of iron ore and 18 million tons of metallurgical coal annually. This merger would create one of the largest global raw material suppliers to the steel industry. One of the more interesting “takes” on the deal came from this Forbes article which reported, “…Cleveland-Cliffs is killing two birds with one stone, using an $8.9b takeover bid for coal miner Alpha Natural Resources as a way to lift its profile as a supplier to the global steel industry and to reduce its attractiveness as a takeover target.”

As a steel buyer, why should we care whether or not Cleveland-Cliffs is more attractive to the steel industry as a supplier and no longer attractive as a takeover target? Read more

This is a true story: I didn’t really understand what a subwoofer was until my husband informed me that he had purchased a cabinet to be placed under our new flat screen television. Since I was in charge of all “design elements” of our home remodel project, I was outraged at this purchase, especially considering I was going to be placing a 14 foot long workman’s table under said location. There aren’t many places a 14 foot table can go, after all. So when I saw that car audio suppliers decided to raise prices for car speakers, subwoofers and amplifiers in a “rare occurrence” according to this TWICE article, I just knew some metals had to be one of the culprits.

And sure enough they are. According to the article, the cost of metals, oil and transportation all lead to the price increases. Subwoofers in particular have quite a few metal components including “an aluminum basket, steel in the back and top plates, and copper in the voice coil…” Noting that such price increases are rare, customers are used to electronic components decreasing in cost over time. Not surprisingly, the cost increases lead to “dramatic, temporary sales declines” and sales don’t pick back up until the next model is available. I think I’ll try that sourcing trick of waiting one week before the new models come out to buy anything. Nothing like a clear-the-old-inventory-before-the-new-model-comes-out sale to  fend off  those nasty price increases.

–Lisa Reisman

Or so went JP Morgan’s statement to the US Congress in 1913. Apart from quoting that perceptive line, an article in MineWeb also covers a new report by Erste Bank of Austria that predicts the gold price will be $1200/oz by the end of the year and could exceed the inflation adjusted all time high of $ 2,300/oz if the fundamentals in the report    highlights prove accurate.

Erste Bank suggests there are several areas of support to the price but they essentially come down to two issues; first the shape of the financial markets and second the balance of supply and demand.

On the financial front, the massive loss of trust in the financial markets has expressed itself in a number of ways beneficial to the price of gold. In a high inflation environment, gold is seen as a safe haven. Historically when inflation is high and interest rates are low or in negative real territory then this supports a high gold price. With foreign exchange reserves at over $6 trillion there is also the feeling some central banks will hedge their dollar exposure by diversifying into gold assets.

As ore grades have declined over the years and mining costs have increased, particularly power, labor, equipment and regulatory costs, the marginal cost of production has risen to around $600/oz supporting prices for the long term. As the most attractive ore bodies are nearing exhaustion, the potential for rapid expansion of progressively less attractive reserves is decreasing with time. The report also sees growing demand for jewelry in increasingly affluent developing markets a a driver for the metal.

Negative factors are seen as a falling oil price and/or a resurgent dollar, both of which could depress the price but would be unlikely to make it crash. Neither of these is considered likely by Erste Bank and they are recommending that their clients buy gold with a view to the market exceeding $1200 oz  by the end of the year. It remains to be seen if their enthusiasm is well founded; one thing we can say is gold has been seen as a safe haven in times of trouble both  economically and politically.   And if you don’t want to call it trouble, we can at least call  it volatile times.

–Stuart Burns    

Test Your Commodity Knowledge!

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How about a little quiz on commodities to start your Monday morning? Thanks to Rox Resources Ltd., we have pulled together a quick quiz to test your knowledge of the hottest commodities of the last 10 years (and also the hottest commodity of the last 6 months). The correct answers may surprise you.

We have heard an awful lot about crude oil, gold, coal and corn this year. Of course steel was not part of this analysis (because it doesn’t fit on the periodic table), though I don’t seem to recall corn or coal on that table either. Hmm….but the long term commodity trends are just as interesting. Though the article is really a business case for investors to invest in other asset classes, specifically commodities due to growth in the developing world, the analysis is interesting all the same. It keeps things in perspective

–Lisa Reisman

Well one analyst is anyway. Liberum Capital released an interesting report to investors last week along the following lines which if correct we felt has some interesting observations for our readers.

Liberum drew initially on the significant falls in mining stocks with the sector down about 19% since May with heavy falls last week in US Steel stocks down 10% and iron ore miners down 6-7%. The catalyst to recent falls appears to be a big drop in thermal coal prices precipitating a wider sell off but particularly in the steel sector.

Some of the key points observed were:

  • Traders reporting large stocks of heavy grade plate in the EU with stockholders offering lower prices as stock levels reached saturation level
  • Arcelor Mittal admitted it had experienced trouble passing on the May price increase for flat rolled in the US
  • GM, Ford, Chrysler and surprisingly Toyota  are seeing dramatically lower sales and hence purchases this quarter
  • Metal Bulletin reported southern Europe rebar and wire rod sales quiet as a result of the construction slow down which is likely to continue for a year or more. MB also reported FeCr prices down 5% in China due to lower demand
  • Coking coal spot prices remain at $350/ton but with some trades down to $300/ton, the market for coking coal is still very tight
  • Iron ore sales remain stable at $180/ton in the spot market but inventories in China are very high. With fuel and hence freight rates at record highs the higher FOB prices secured by Rio Tinto and BHP are providing lower CIF prices than Vale’s material shipped all the way from Brazil. Consequently Rio  and BHP are tipped as better buy options than Vale

With ferrochrome trading at 2x marginal cost there is little to support a further slide in prices. Likewise vanadium prices are sliding but molybdenum and manganese remain firm, although manganese trades at over 3x marginal cost so any weakness in demand could see a slip in prices.

The conclusion to the report was that share prices for producers in certain commodities are at risk because of the prospects for prices this year. Those at risk were steel raw materials and those considered safe were precious metals, aluminum, copper and nickel.   This analysis broadly supports our own reports on these metals over recent weeks.

–Stuart Burns

Our thanks to Michael Rawlinson of Liberum Capital for the reproduction of parts of his investors report

Now why do I feel that many of you would rather be reading about about GrinderGirl than what the CEOs of two major steel producers had to say about futures markets? Well in a way, some of the statements made at that ironically named “Steel Success Strategies” conference were about as crazy as GrinderGirl’s antics. Many of these comments raise a lot of questions. Consider the following:

Dan DiMicco, Chairman and CEO of Nucor recently said “that futures trading was Ëœphony baloney’ that encouraged unethical and illegal activity.” Why would the CEO of Nucor make this comment? Specifically, who/what does he mean by unethical and illegal? Mortgage CDO traders? We can’t help feeling Dan DiMicco is being deliberately misleading when he discusses futures trading and sub-prime loans in the same breath. He knows there is no connection or even similarity between the two but he is attempting to bad mouth futures markets by making a false link to discredited CDO’s. There is nothing illegal about futures markets they have been in existence for well over 130 years; if there was anything illegal about them you can be sure a lawyer would have found it before now. And tell me is there anything immoral about a buyer or seller wanting to stabilize their company’s prices by buying or selling forward on an exchange? Nucor is making record profits on the back of a market made unnecessarily tight by US producers opportunistically exporting while putting their long suffering domestic customers on allocation. Now Dan, is that a morally defensible position? Read more

Demanding higher wages and more benefits, 30,000 miners in Peru held strikes at  several mines this week, with involvement from more than half of Peru’s 67 mining unions. The world’s leading silver producer, Peru also exports copper, gold and zinc, which has led to a high economic growth for this country. But workers still haven’t felt economic growth in their own pockets, and declared that companies should announce higher profit shares and better pensions before the strike ends. Read more

One little side benefit of high commodity prices is companies start to quickly ramp up product substitution and new product innovation. Two years ago, when nickel skyrocketed, many firms moved toward 400 series stainless alloys and other product substitutions. High oil prices have a dual benefit – they change consumer behavior which in turn changes corporate behavior. Of course there is nothing quite like a little adversity to spur some much needed innovation.

And though we have talked about this before in terms of metal product substitutions within the automotive industry, the innovation seems to be moving at a fast and furious pace. Consider the case of platinum metals used in car exhaust systems. Several Japanese automakers are making use of nanotechnology to significantly reduce the amount of precious metals used per car. Though steel remains the 800 lb gorilla in this industry, platinum metals at $200 per car, or $10b annually for all automakers, is no drop in the bucket. More stringent emissions requirements have driven the platinum metals growth within the industry by more than 8 percent just last year, according to this Reuters article. The article goes on to say companies like Nissan, Mazda, Japan’s Mitsui Mining and Smelting and Toyota all have various projects in the works to drastically reduce platinum metals usage in exhaust systems.

Good for them! Now if the automotive OEM’s can start chipping away the quantity of steel per average vehicle (more than 2000 pounds), we’ll be in even better shape!

–Lisa Reisman

Ferro Silicon: Further to Go?

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The Ferro Silicon market has gone through some rapid price escalation over the last 12 months, but finally appears to be drawing breath. To understand what drives the price does not require any great insight. Ferro Silicon is produced from silica (usually a form of sand), coke, a source of iron (such as scrap or furnace metallics) and of course a lot of power. Larger electric arc furnaces are used to make higher Silicon content FeSi of about 15% and up. On the demand side most FeSi is used in the steel industry for a number of applications, including alloying in a wide range of iron based materials and deoxidizing, in addition to the production of magnesium from dolomite via the Pidgeon process (that’s the inventor not the bird!). Steel production has undergone huge growth these last few years and is still growing globally at a robust rate. So with rising input costs in the form of coke and energy prices, and rising demand from the steel sector it is no surprise FeSi prices have risen 50% in the last year.

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It’s not just fears of U.S. inflation that have led to the recent fall of copper. A weaker demand from China is causing additional worries in the copper market. The world’s top consumer of copper and a producer of the red metal, China saw copper hit a remarkable high point last April, reaching $8,800. Soon afterwards, however, the volatility of the market took hold. China’s refined copper consumption turned from the high April outputs to drop 10.2 percent in May.

“You could argue that it’s surprising how well copper’s been doing given that Chinese thirst is so much less than it was,” ABN Amro analyst Nick Moore told Reuters about the Chinese data. This isn’t promising news, since the summer is already a slow time for copper demand. Read more

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