This morning in metals news, Chinese iron ore futures fell to their lowest level in 10 weeks, JP Morgan weighed in on the impact of tariffs on U.S. consumers and Tokyo Steel has decided to hold its prices steady for September.
According to Reuters, the steelmaker said it plans to lay off fewer than 200 workers at its Great Lakes Works facility — located on the Detroit River in the Ecorse, Michigan — and that the layoffs could last longer than six months.
The plant produces steel products used primarily by the automotive industry, including hot-rolled, cold-rolled and coated sheet steels.
BHP Announces Fiscal Year Results
For the fiscal year concluding June 30, 2019, Australian miner BHP announced underlying profit of $16.1 billion, about flat with 2018 ($16.0 billion).
The miner reported underlying EBITDA of $23.2 billion, also flat with 2018.
“Higher prices and record production from several of our operations contributed to strong operating cash flows,” CEO Andrew Mackenzie said. “We used that cash to invest in attractive growth projects, advance our exploration programs and increase returns to shareholders. We now have six major projects under development in petroleum, copper, iron ore and potash, following the approval of the Ruby oil and gas development this month. All of them are on schedule and budget.”
Various sources are reporting both a slowing in demand growth and a fall in output for primary aluminum. So far this year, that combination has been led by a faster fall in output, pushing the market into a larger deficit position as the first half progressed.
Reuters reported the results of a poll showing a forecast for a global aluminum deficit of 550,000 metric tons this year — down from an earlier estimate of 868,240 tons — as demand growth has recently slowed.
Inventory levels support estimates of a deficit.
Primary inventories in warehouses tracked by the Shanghai Futures Exchange (ShFE) are hovering at their lowest since April 2017, according to Reuters. LME stockpiles have improved recently, but are still down 22% from the beginning of the year.
Not surprisingly, futures markets in China are showing more resilience to a generally depressed commodities sector. The ShFE’s most-traded aluminum contract is at its highest since May 29, hitting 14,285 yuan ($2,022.02) a ton last week before easing to close at 14,200 yuan a ton.
The LME, on the other hand, has continued to drift lower over the last two weeks after failing to hold above $1,800 a ton in July.
The disparity in outlook is down to the domestic production situation in China.
New smelter startups have been delayed as Beijing is taking a hard line with aluminum producers, forcing those keen to open up new capacity to close corresponding capacity at older, less efficient plants. Summer production has at best been flat and first-half production is marginally down from last year’s level.
Investors have been encouraged as Typhoon Lekima stormed over Shandong province, causing widespread flooding. Although there are no reports yet of aluminum outages as a result of the typhoon, the expectation is some smelters will suffer flooding and/or power failures, resulting in lost production.
Consumption, however, is softening, both in China and the rest of the world.
Weaker automotive production is a significant factor, as trade worries are causing just that — worries — rather than a significant downturn in non-automotive consumption so far. Expectations are for a pickup in Chinese domestic primary production this fall as the impact of the flooding wanes and those delayed startups come onstream.
Meanwhile, consumption is expected to soften further in Europe and Japan as both areas flirt with stagnation at best or, possibly, outright recession (being the only remaining mature markets open to China after tariffs essentially shut off the U.S. market).
The prospects this year for a rise in aluminum prices remain poor. However, if demand holds up and supply continues to be constrained, it could set the scene for a gradual rise next year, particularly if a resolution to the trade war is miraculously agreed.
This morning in metals news, President Donald Trump on Sunday said he is not ready to make a trade deal with China just yet, ArcelorMittal faces falling steel prices as it attempts to revive India’s Essar Steel and the Department of Commerce today added 46 Huawei affiliates to the Entity List.
“BIS has also announced that it will extend the Temporary General License (TGL) authorizing specific, limited engagements in transactions involving the export, reexport, and transfer of items – under the Export Administration Regulations (EAR) – to Huawei and its non-U.S. affiliates which are subject to the Entity List,” the Department of Commerce said in a release. “The continuation of the TGL is intended to afford consumers across America the necessary time to transition away from Huawei equipment, given the persistent national security and foreign policy threat. This license will be effective on August 19, 2019 and last an additional 90 days.”
This morning in metals news, a Turkish military pension fund has reportedly reached a tentative deal to buy the ailing British Steel, copper prices held flat Friday and the latest round of tariffs could impact China’s ability to prop up its economy.
LME three-month copper held at around $5,750 per ton, while the most-traded SHFE copper contract held at around $6,591 per ton, according to Reuters.
Tariffs and China
Earlier this month, President Donald Trump announced a new round of tariffs on Chinese products, aiming a 10% tariff on an additional $300 billion in Chinese goods (although the U.S. later announced the tariff would be delayed for some items in the product list).
With the new tariffs, nearly all of the U.S.’s imports of China would be subjected to tariffs.
According to a J.P. Morgan analyst in an interview with CNBC, the tariffs could impact Beijing’s ability to mitigate the damages via government measures. Bruce Kosman, chief economist and head of global economic research for J.P. Morgan, said China has deployed policies to mitigate the damages of the tariffs over the last year, but it is unclear how much more China will be able to do on that front.
Within the Stainless MMI basket, LME nickel prices increased the most once again this month, recording a 13% increase. Rather than correcting back to pre-spike levels, traders continued to buy into the market.
Source: MetalMiner analysis of the London Metal Exchange (LME) and FastMarkets
In addition to the price rise, stock levels have also risen as a result of Chinese stockpiling activities ahead of the Indonesian export ban.
Very recent rumors of Indonesia possibly pushing up a raw ore ban created a fresh round of speculative buying activity during this past week, which gained even more steam in the first week of August.
The new export ban regulations, initially announced in 2017, will take effect by 2022. This most recent round of nickel price escalation through speculation may also spur a new round of Chinese direct investment into Indonesia (aimed at securing future stocks of the metal ore).
Source: MetalMiner analysis of the London Metal Exchange (LME) and FastMarkets
Looking at a longer-term chart, nickel prices previously spiked at various points in time. After a steep period of rising prices, we should expect to see a quick correction followed by a period of time with higher prices.
For example, it appears that a speculative price spike took the price away from fundamentals back in 2016, as called out by the rectangular box in the chart below. In that case, the price stayed higher for about six weeks before dropping back.
Source: MetalMiner analysis of the London Metal Exchange (LME) and FastMarkets
Should a steady uptick in positive trading volume continue, that would indicate the uptrend will continue. During the past week or so, we have seen lower trading volume; however, volumes still look relatively strong.
Global Demand Outlook Declines
According to Outokumpu’s Q2 results, the company saw weaker stainless steel demand heavily impacting declining sales, which dropped by around 8% compared to Q2 2018.
Difficult competitive conditions in Europe hurt sales, with that market struggling against cheap Asian imports. Permanent safeguards became effective in February, but import penetration increased back to 30%. In addition, a new quota period started July 1.
While import levels into the U.S. remain low, the company reports ongoing distributor destocking will limit volume upside in the Americas in the short term. Further, the company expects challenging conditions to continue through 2019.
The International Stainless Steel Forum (ISSF) released Q1 production figures in early July showing a 2.5% year-on-year decline in global stainless steel melt shop production.
In Europe, the decline reached 5.7%. Asian production outside of China also declined by an estimated 5.7%. The U.S. saw a decline of 2% and Chinese production declined by 1.5%.
SHFE Nickel Prices Jump
SHFE prices also reacted to the rumor regarding Indonesia’s consideration of moving up its ore export ban.
SHFE nickel prices reached a new high for 2019, in addition to a new longer-term high.
Source: MetalMiner analysis of FastMarkets
While prices increased recently, prices were much higher at previous points in time.
Most notably, nickel prices surged past $50,000/mt, or roughly around CNY 500,000/mt, and then sank back down to around $10,000/mt during a three-year period from 2006-2009, according to data from the International Nickel Study Group (INSG). At the start of that period, prices were similar to current prices and jumped about 400% in around 1 1/2 years (at the the midpoint of the aforementioned period).
On the way back down, prices stalled at the $30,000/mt level for a year during a period of historically low stocks.
Domestic Stainless Steel Market
Source: MetalMiner data from MetalMiner IndX(™)
Stainless 304 and 316 NAS surcharges nudged back up in early August, still maintaining sideways movement.
Weaker demand outweighed higher nickel prices this month as surcharges reversed.
What This Means for Industrial Buyers
MetalMiner’s stainless steel price index hit a one-year high. Industrial buyers need to stay alert for the right opportunity to buy, as nickel prices may be at a short-term speculative high that still seems to be going strong. As ingot prices rise, expect premiums to follow.
Chinese Ferro Alloys FeMo lumps also jumped by 11.7% this month, while FeCr lumps increased by 0.6%, reversing mild declines for both prices last month. Other Chinese prices in the index moved sideways, with only mild price movements of under 0.5%.
Korean prices for 430 CR 2B stainless steel coil and 304 CR 2B stainless coil decreased by 5.8% and 4.5%, respectively, to $1,221/mt and $2,149/mt.
As covered by MetalMiner’s Stuart Burns, Glencore announced it would halt production by the end of the year at the world’s largest cobalt mine: Glencore’s Mutanda operation in the Democratic Republic of the Congo (DRC).
Last week, the miner reported its adjusted EBITDA for the first half of the year came in at $5.6 billion, down 32% on a year-over-year basis, with CEO Ivan Glasenberg citing “a challenging economic backdrop.”
Among the challenges has been a plummeting cobalt price. As a result, the miner announced it will move toward pausing production at its Mutanda copper and cobalt mine.
“However, our African copper business did not meet expected operational performance,” Glasenberg said. “We have moved to address the challenges at Katanga and Mopani with several management changes as well as overseeing a detailed operational review, targeting multiple improvements to achieve consistent, cost-efficient production at design capacity.
“Our teams have identified a credible roadmap towards delivering on the significant cashflow generation potential of these assets, at targeted steady state production levels. At Mutanda, we are planning to transition the operation to temporary care and maintenance by year end, reflecting its reduced economic viability in the current market environment, primarily in response to low cobalt prices.”
So, what kind of impact will the removal of Mutanda’s cobalt — making up a whopping 20% of global supply — have on the market? Burns explained Glencore’s closure of zinc mines in 2015 is credited with the recovery of that market, so there is precedent for the maneuver.
In addition, the electric vehicle (EV) revolution hasn’t taken off perhaps as much as expected.
“Cobalt demand has traditionally been driven by its use as an alloying element, but it is increasingly being seen as part of the lithium battery demand story because of its role in production of advanced batteries,” Burns said. “The electric vehicle (EV) market, though, has failed to match up to its hype this decade. Although both lithium and cobalt prices have risen as a result of battery makers securing their supply chain, the reality is supply is perfectly adequate.”
Meanwhile, the GOES MMI, which tracks grain-oriented electrical steel, picked up six points for an August reading of 197.
The U.S. GOES price hit $2,719/mt as of Aug. 1, up 3.2% from the previous month.
A.K. Steel, the lone remaining electrical steel producer in the U.S., announced its second-quarter earnings late last month. The firm brought in net income of $66.8 million in 2018, up from $56.6 million in Q2 2018.
Shipments in its stainless/electrical segment were down, however, coming in at 198,400 tons in Q2 2019, down from 221,500 tons in Q2 2018. For the first six months of the year, shipments amounted to 405,000 tons, down from 422,200 tons in the first half of 2018.
Meanwhile, German firm Thyssenkrupp, also a producer of electrical steel (with plants in Germany, India and France), has announced it will continue to move forward with realignment plans amid disappointing quarterly results.
For the quarter ending June 30, 2019, the firm’s adjusted EBIT came in at €226 million, down 32% from the €331 million for the same quarter in 2018.
In addition, the firm revised its full-year 2018-2019 forecast down to €0.8 billion from the previous forecast of €1.1 billion-€1.2 billion.
In addition to improving performance, the firm cited its planned partial IPO of its elevator business in 2019-2020 and efforts to improve organizational efficiency as part of its realignment efforts.
“The most important portfolio measure is the planned partial IPO of Elevator Technology,” the company said. “This will allow thyssenkrupp to sustainably strengthen its capital base and make the value of its elevator business visible. By retaining a majority interest, the Group will also continue to profit from future value growth. With the expected proceeds, the Group will increase its financial leeway for necessary restructuring and securing the future of its businesses.”
Actual Metal Prices and Trends
Japanese steel plate fell 0.4% month over month to $790.22/mt as of Aug. 1. Korean steel plate fell 5.4% to $564.33/mt. Chinese steel fell 1.2% to $611.40/mt.
Amid the latest jolt of trade uncertainty — namely, President Donald Trump’s intention to impose a 10% tariff on an additional $300 billion in Chinese goods — safe-haven metals prices have increased.
Gold, for example, last week moved over $1,500 per ounce for the first time in six years, Reuters reported, while silver prices have also gained momentum.
Demand for gold in the first half of the year was strong, according to the World Gold Council, rising 8% on a year-over-year basis. The demand was largely powered by central bank buying and a rise in holdings of gold-backed ETFs, according to the World Gold Council.
“June was a big month for gold,” said Alistair Hewitt, head of market intelligence for the World Gold Council. “The price broke out of a multi-year trading range to hit a six-and-a-half year high and gold-backed ETF assets-under-management grew by 15% – the largest monthly increase since 2012. While the Fed’s dovish turn was a key driver for this, it also builds on a strong H1 which saw gold demand hit a three-year high, underpinned by extremely strong central bank buying. But we also saw an uptick in sales at an individual level as investors took advantage of June’s price rally to lock-in profits; jewellery recycling and retail bar and coin liquidations both rose.”
The U.S. silver ingot/bar price rose 6.2% month over month to $16.23 per ounce as of Aug. 1. U.S. gold bullion rose 0.3% to $1,413.40; however, as noted above, the Trump administration’s tariff announcement sent the gold price past the $1,500 per ounce mark.