Articles on: Metal Prices

Last week, I had the opportunity to speak with Wayne Atwell, Managing Director of Casimir Capital. Wayne has toured over 500 mines and mills on six continents. He has over 35 years of experience in the field of investment analysis for Metals and Mining industries. He was selected as one of the ten best buy side stock pickers by Institutional Investor magazine several times and was rated as one of the top analysts in metals and mining by Institutional Investor and Greenwich Associates for more than twenty years. We wanted to hear Wayne’s perspectives on metals markets and in particular if he saw any trends that we may have missed on MetalMiner.

Wayne had a few things to say about copper, “Metals are pretty much ahead of themselves. Sometimes folks think all metal fundamentals are the same but that’s not true. Copper has a steep cost curve but zinc doesn’t.   The zinc cost curve is much flatter all of the producers are pretty much at the same level. China only supplies 22% of its own copper. China is investing all over the world to lock in supply.  In terms of nickel, Wayne suggested that it had the best fundamentals of all of the base metals running a small surplus this year and a deficit next year.

We spent a fair amount of time discussing China. We found two pieces of data in particular quite interesting. The first involves “intensity of use which relates to the amount of metal consumed by an individual (measured on a per capita basis). We have seen an analysis of this before, primarily from the steel industry. But specifically some of Casimir’s research suggested, “China’s share of global metal consumption has risen from 3-5% 25 years ago to 30-40% today. The reasons for that growth all relate to rising living standards and the general urbanization of the Chinese economy. Casimir suggests the intensity of metal use will continue to grow for another ten to fifteen years.

The second piece of data that intrigued us involves China’s share of global consumption and its self-sufficiency ratio. Wayne suggested that some of the run-up in certain metals likely relates to where China lacks commodity self-sufficiency particularly copper, nickel, zinc and aluminum. The chart below from Casimir’s research highlights this in greater detail:

Though we haven’t plotted China’s self-sufficiency in other commodities, Wayne mentioned a couple of additional metals in which China relies upon imports including molybdenum and metallurgical coal.

Finally, we asked Wayne to comment on price trends. He pointed to momentum as an important factor in the psychology of prices, “Eventually, the metals will trade on their fundamentals. In the next month or two we’ll see a correction but we’re in a secular bull market.

–Lisa Reisman

After reading Stuart’s earlier post regarding a potential fall for aluminum, we decided to drill into Alcoa’s latest earnings announcement to identify some of the small signals which would support (or not support as the case may be) the underlying assertions that the aluminum market may stand ready for a correction. To do that, we turn to Alcoa’s 1st Quarter 2010 Earnings Conference Call powerpoint presentation available here.

The good news when looking at Alcoa revenue by end market, growth appeared in 61% of its segments such as automotive, commercial transport, industrial products, alumina and primary metals. Other sectors still show a year over year decline (e.g. aerospace, Beverage and can, IGT, Packaging, Distribution/other). The realized aluminum price according to Alcoa, increased by 8% whereas alumina price realization increased by 13%.   We won’t spend time focusing on Alcoa’s internal cost reduction initiatives though they also appear quite positive. Alcoa sees demand for flat rolled products increasing in the second quarter based on “modest improvement in aerospace and industrial markets. In addition, Alcoa still forecasts a global demand growth rate of 10% from last year (which isn’t saying much but still, a step in the right direction). Global aluminum supply remains balanced, again according to Alcoa and the surplus of primary aluminum is “manageable. That’s the good news.

The not so good news includes the following 39% of Alcoa’s revenues still come from year over year declining revenue changes including aerospace. Looking at Alcoa’s “earnings bridge analysis (that depicts which variables moved favorably vs. unfavorably quarter to quarter) as one can see volume remains light and energy costs dragged income. (The LIFO allowance fluctuates but is always a negative number)

Source: Alcoa

In all sectors of Alcoa’s business, with the exception of Engineered Products and Solutions, volumes hit performance.

Our conclusion? A high and/or rising aluminum price certainly has a disproportionate (positive) impact on earnings. And though the company appears to have made great strides in its own cost reduction and working capital efforts, overall demand still suggests a worrisome set of signals. Combine that with the earlier post on an aluminum market correction and one can see why the analysts feel the Alcoa earnings announcement was a mixed bag.

–Lisa Reisman

Aluminum is looking vulnerable. Although the market has been in oversupply for at least the last two years and exchange traded stocks have risen to record numbers, prices have been supported by a financing game that goes like this. Banks and large trading houses can buy or take delivery of primary aluminum ingot at spot or up to three months forward prices and sell that metal for delivery 15 months out on the LME. The 15 month forward price has been consistently higher than prices for shorter time frames, by virtue of a strong forward price curve or contango, as the following graph courtesy of the LME shows:

For much of the first half of 2009, the difference between 3 month seller and 15 month buyer prices was 8-9% of the 3 month price, leaving room for a little profit after warehousing costs, insurance and finance if you can access the ultra low interest rates that have been available based on Fed/Central bank rates of 0.25% or so as the banks and major traders can. Major central bank rates have not crept up yet although there is expectation that Fed rates will have to rise later this year in the US if the economy continues to sustain its current promise. But the forward price curve has been flattening as the metal price has risen such that now the difference between 3 month seller and 15 month buyer is just 4%. Even after this weeks drop and compared to the cash or spot price the difference is only 5%. As the margin has narrowed investors have kept the ball rolling by taking metal out of comparatively higher priced LME approved warehouses to store it in cheaper off market premises. The approx US$ 45-50 per ton reduction in costs sustained the trade through the third quarter but towards the end of last year and early this year it would seem the game was winding up.

Signs of spot market weakness are beginning to show with Japanese physical premiums down 5% quarter on quarter to US$ 122-124/ton according to a World Aluminum review of the second quarter contract negotiations. With the US dollar looking much firmer this year than last there is less of an incentive to invest in metals as a hedge against a falling dollar, not that aluminum was a principal beneficiary of that trade, copper rose on dollar weakness more as a result of its stronger fundamentals. Even Rusal’s announcement this month that they are looking to park 1 million tons of aluminum into a physically backed electronic exchange traded fund can be seen in light of the closing of the long term finance window as an attempt to find ways of maintaining production rates in an over supplied market.

Some analysts now predict an easing of aluminum prices this year, a position we took in our Price Perspectives report in Q1. That would be welcome for consumers but a blow to the nascent recovery in the distributor market which has just been getting accustomed to a few months of gradually rising prices and volumes. A drop now would bring demand from distributors to a halt as buyers up and down the supply chain revert to wait and see.

–Stuart Burns

Strange question to ask you may say but their recent success in increasing the benchmark iron ore price some 90% over last year’s level and simultaneously ditching the 40 year old annual price fixing in favor of a quarterly pricing mechanism seems to have angered steel makers and authorities the world over. For once the Chinese and Europeans have found something to agree about – they don’t like the dominance of the big three iron ore producers over the iron ore market. The three control something like 70% of all seaborne iron ore trade and set the price and largely the pricing terms that the remaining producers follow.

In an FT article, the China Ministry of Commerce is said to be looking at bringing action against the producers under Chinese anti monopoly laws. The Chinese are angered that even though they are the world’s largest iron ore consuming country and have four of the world’s top ten steel producers in their ranks they feel they have absolutely no bargaining power in their dealings with iron ore suppliers. Part of this is their own fault. The Chinese steel industry is notoriously fragmented with something like 300+ steel producers. The authorities try to consolidate purchasing by only allowing the largest consumers licenses to import but mid sized consumers find ways round it. In an economy that is growing so fast there is a natural tendency to secure supplies today regardless of price in the belief the market will rise tomorrow and you can still make a profit. Under such circumstances even China’s size does not give it the bargaining power it believes it is due.

Having said that Europe does not fare much better, even though the region is the second largest steel producer after China and its industry is very much more consolidated. It has been forced to accept the big three price increases and shift to quarterly pricing, prompting the industry representative organization Eurofer to push the EU for action to tackle “unfair competition and excessive pricing in the iron ore sector according to a Telegraph article. Playing to the politicians gallery, Eurofer is quoted as saying, “Iron ore is the basis for the EU’s most important value chain. If economic access to it is hampered through unjustifiable pricing and consequently steel production in Europe is jeopardized, this will have severe consequences,” Not that steel producers are above getting the most for their finished products if they find themselves in a bull market as consumers will recall from 2007/8 when steel prices (and producers profits) reached historic highs. Eurofer’s gripe is as much to do with the forced shift to quarterly pricing, which, they say, makes it very difficult to give annual contracts to major consumers like automotive. However it is all shaping up for a showdown between Chinese and European anti competition authorities on one side and the iron ore producers on the other, either as a series of country specific cases or possibly a more coordinated offensive as called for by the World Steel Association in another Telegraph article.

The iron ore producers response is to ignore allegations that they have unfair control of the market saying instead that they are plowing their profits into new mines to increase the available supply, not that availability appears to be the problem. The big three are not saying price rises are because they don’t have enough iron ore. This is not a supply and demand case where too many buyers are chasing too little supply. It’s more a case of too much demand is chasing after a limited number of suppliers. If one supplier names a high price and the other two follow in collusion or not the buyers have nowhere else to go. In that respect maybe the steel mills have a case. Ironically this action is coming just as the industry moves toward a more open market set pricing structure. With quarterly pricing fixing rather than annual allowing price movements that are more representative of the underlying conditions and the growing OTC iron swaps market creating the opportunity for hedging, the iron ore market could be said to be more open and transparent than it has ever been maybe that’s just the point. If supply is largely held in the hands of just three firms even quarterly pricing and a swaps market doesn’t create a fair market.

–Stuart Burns

The new iron ore contracts have made many steel buyers ask the question, how will this impact steel prices? How do the contracts affect North American buyers? How do US mills secure their raw material supplies? Will steel commodity volatility increase as a result of the shift from annual iron ore contracts to quarterly contracts? Are there any tools, strategies or methodologies that will allow buying organizations to mitigate some of this new uncertainty?

We may not have all of the answers to these questions but our Q2 Steel Market Update webinar will look at these questions in detail and more. It’s not too late to sign up though spaces are limited.

Join us next week in one of three webinars to learn more about how these developments will change the way your organization will think about its steel buy. Yours truly, Stuart Burns and John Campo, VP of Sales & Marketing at O’Neal Steel will cover global and domestic steel developments in this one hour webinar.

–Lisa Reisman

Managing a multi-national like ArcelorMittal certainly has its challenges, we tend to use that phrase multi-national rather loosely nowadays to label any firm with operations overseas but strictly speaking it is a firm that has subsidiaries in two or more countries. It is in part a measure of complexity and it doesn’t get much more complex than ArcelorMittal listed in New York, Amsterdam, Paris, Brussels, Luxembourg and Spain with operations in 60 countries and 300,000 employees. As demand and prices slumped in late 2008/early 2009 the group saw revenues nearly halve to $65.1bn in 2009 from $124.9bn in 2008. Net income slumped in 2009 from $9.39bn in 2008 to just $118m and Lakshmi Mittal said when ArcelorMittal’s latest results were published that 2010 will be “challenging”. The firm sees the prices of raw materials increasing this year iron ore, coal and energy prices. In an interview with the Telegraph newspaper Lakshmi Mittal is quoted as saying, “We are concerned about this cost increase. ArcelorMittal has a strategy to invest more on vertical integration over the medium term. That means we should be more self-sufficient on our own captive supplies. We are making some progress in iron ore but we are not making much progress on coal self-sufficiency. Today, we’re about 50 to 60% self-sufficient in iron ore but for coal it is only about 15 to 20%. The group clearly needs more vertical integration, even some of those it thought secure like its Kumba reserves in South Africa are now the subject of a legal challenge. So on the supply side the group is looking to secure raw material supplies.

On the demand side stagnant or slow growth in mature markets such as Europe or North America where AM has much of its capacity will not deliver the growth the firm needs to meet shareholder expectations. The growth is coming from emerging economies such as China, India, Brazil and the Middle East. So although, on the one hand, battling dramatically rising raw material costs that threaten to push the group into the red the firm is simultaneously positioning itself to invest in these growing markets with varying degrees of success. In Brazil it is already the country’s largest steel maker and wants to construct further steel plants. In India AM has experienced similar problems to other foreign owned and even some domestic steel mills in gaining both mining and development rights to the large tracks of land necessary for mines and plant construction but the firm now seems confident that one or more of its current applications will move forward in Q2. That’s just as well because Mittal was clear in a recent interview that he saw India as a major development opportunity for the group, citing a strong middle class, the need for and intent to develop extensive infrastructure investment and a young demographic as reasons why India would be a very important market, not just for steel but for all products in the future.

China of course dwarfs even India but as Mittal is quoted as saying, “There are thousands of steel companies in China, producing anything from 50,000 to 5m tons a year. China wants to have the top 10 companies producing 50% of China’s volumes. I hope that will happen soon because it will create a system for the steel industry. But they don’t allow foreign companies to hold majority shares yet.” – ArcelorMittal is a minority shareholder with stakes of less than 35% in two Chinese steel companies but is currently not permitted to take majority control of local production, which must be a frustrating position for the world’s largest steel maker in the world’s largest steel market.

–Stuart Burns

A recent Sydney Morning Herald article gave a very bullish prediction on global steel production saying production for the first calendar month of 2010 was a record 113.4 million tons, exceeding the previous record for the month of 112.9 million tons in 2008. Concerns were raised by Moody’s and have been mirrored elsewhere that so much is dependent on growth in China continuing. Concerns exist that either stimulus measures will be prematurely removed or rising inflation will force Beijing to reign in growth by tightening credit or raising interest rates. Reporting on the Japanese market, Reuters said this week that Japan’s crude steel output is expected to keep growing in the April-June quarter on strong exports of automotive sheet steel, although the recovery lacks strength due to weak U.S. demand, the Japanese Ministry of Economy, Trade and Industry said on Monday. Crude steel output in April-June, the first quarter of Japan’s financial year, is seen rising 37.1% from the same period last year to 26.17 million tons. According to the article, the world’s second-biggest steelmaker Nippon Steel Corp and sixth-ranked JFE Holdings Inc are raising production to meet demand from fast-growing Asian economies, particularly China.

If so much relies on the China market continuing to do well we thought a review of prices in the domestic steel market this quarter may give some early signs of possible weakness. If spot market prices have flat lined or worse are dropping it would suggest the market is in oversupply and optimism on the part of other Asian producers is misplaced.

The following graph is taken from the MetalMiner IndX that tracks a range of daily ferrous and non ferrous metal prices in China.

As we can see the trend has been for a gentle dip around the Chinese New Year in February when the markets were quiet either side of the holiday and the exchanges largely closed for a week. But since then prices have again been moving up particularly for billets a precursor for the production of bar and other long products, and rebar and H shaped beams both used in the construction industry.

This ongoing strength in spite of credit tightening supports reports elsewhere that the market is continuing to consume metals at a robust rate and although Beijing’s cautionary moves have spooked some investors they have not yet had any impact on the rate of growth.

Although it is unlikely growth in demand will significantly pick up in Europe this year and will be relatively slow to come back in the US, it is a fair probability prices will continue to rise due to rising raw material costs. This will likely impact China and Europe before the US where steel producers are more reliant on annual and spot priced iron ore imports from Brazil and Australia, and coking coal from South Africa and Australia both of which are set to roughly double this year. It will be interesting to see if the strength of the steel market allows producers to pass these costs on and still retain the volumes currently being produced.

–Stuart Burns

Listen here for details about MetalMiner’s latest webinar, Q2 Steel Market Update, featuring guest speaker, John Campo VP of Sales & Marketing with O’Neal Steel.

Sign up for the date/time that best works for you:

April 13 9:30 – 10:30 am CST Live Event:

April 15 12:00 – 1:00 pm CST Second Seating:

April 16 10:00 – 11:00 am CST Third Seating:

The details: The webinar will provide listeners with a market update and outlook for for steel as well as demand trends by key end use segment.   Participants should come away with:

  • a clear understanding of the drivers of current prices
  • the role and impact of China on the steel market
  • cross-industry insight into where demand is coming from
  • tips, ideas and strategies for mitigating costs and reducing risk

Join us for this free event! Sign up quickly as we only have seating for 100 people per seating!

Sponsored by:

These past few weeks, some of you may have noticed our more frequent discussion of variables impacting metals prices. Whether you track steel, aluminum or copper prices, everyone wants to know where prices are going and what will push prices in one direction or another. Whether you look at these five metrics that we covered last week or this handful of Chinese economic indicators or news stories saying that Boeing is increasing production and March auto sales show an economic rebound, at least one person sees quite different writing on the wall.

We caught up with Rick Davis, a self-described “numbers geek physicist who runs the Consumer Metrics Institute out of Lakewood Colorado. Davis started his, for lack of a better description, consumer data research firm out of a frustration with the inherent biases in current economic research data. He shared with me some of his thoughts and rather than draw conclusions for you, I’d like to share with you some of Davis’s research so you can make your own decision. But first, what biases does Davis take issue with? He thinks the retail economic indicator “same store sales has two design flaws. The first, the notion of under-reported casualties that same store sales only report the stores that are still around, not the stores that go belly-up. This results in a bias because the data will appear more favorable than the underlying economic reality. He went on to describe Circuit City and Best Buy as an example. When Circuit City went out of business, Best Buy picked up share, which looks favorable from a reporting standpoint and even suggests growth when in fact, Best Buy may only be gaining share left from the void of Circuit City. Rick calls this Ëœsurvivor bias’ (maybe it’s also the proper economic term, I don’t know)

The second issue with economic data that troubles Davis involves the delay in relaying data. According to his site, “Leading Indexes that rely on data published by governmental departments are generally updated monthly several weeks after the month’s end. Often the governmental data includes some estimates and is necessarily preliminary, so a final set of numbers is published yet a month later. Going through the myriad of charts, statistics and analyses that Davis has on his site, one can see why he draws that conclusion. Take a look at this chart below:

The pink line is what the government is reporting but look at where the Consumer Metrics Institute line goes. According to Davis, “production trails consumption. A healthy factory is going to respond to consumer demand. So what explains some of the positive factory/producer statistics including greater capacity utilization?” Davis believes, “producers may be re-stocking but are lagging consumer demand. Upturns in manufacturing may just involve re-stocking and response to consumer demand from the third quarter of last year. It’s hazardous for manufacturers to ramp up production too rapidly.

In a follow-up post, we’ll examine some of the other key economic indicators Consumer Metrics Institute tracks, their own biases and how these indicators square against the rather positive headlines of the past few days.

–Lisa Reisman

For any of you aluminum and stainless steel buyers out there, you will not want to miss MetalMiner’s first webinar given tomorrow, Wednesday March 10 at 9:00am CST. The webinar provides an in depth look at the global markets for aluminum and stainless steel and we will be joined by guest host, Tony Amabile from TW Metals who will cover domestic market trends for both metals. This webinar dovetails with MetalMiner’s new Price Perspectives Series, research that examines not just historical data but the drivers impacting prices looking forward through 2010.

As any metal market observer, buyer or analyst knows, the degree of commodity volatility occurring within the base metal, ferrous metal and precious group metal marketplace has never been greater. Forecasting, budgeting and planning have become more challenging as a result, forcing everyone to pay much closer attention to a broader range of factors impacting metals markets. We believe attendees of the event will walk away with the following:

  • a clear understanding of the drivers of current prices
  • the role and impact of China on both metals
  • cross-industry insight into where demand is coming from
  • tips, ideas and strategies for mitigating costs and reducing risk

The registration process takes less than 20 seconds. Please join us on Wednesday. If you have any comments or questions, please feel free to leave a comment here or drop us a line at lreisman (at) aptiumglobal (dot) com.

–Lisa Reisman

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