Articles on: Metal Prices

This is the second of a two part series. You can read the first post here.

Since China doesn’t produce much steel via EAF technology (they actually produced more via that method some years ago), the relationship to watch is the one between iron ore and scrap pricing (moving forward). Harris also confirmed something we have mentioned on these pages previously the US is largely self-sufficient for iron ore and coking coal. Europe (e.g. Turkey is the largest scrap importer) and China must import its key raw materials. Another key “learning for us involved the correlation between oil prices, rebar and heavy melt scrap.

What I found most interesting about the discussion related to questions from the audience around “diminished scrap flows and how that feeds into the EAF supply chain. Harris answered this by stating, “Three major consumers control 70% of the market place and they have guaranteed streams. If scrap exports go to 30m tons (the panelists said scrap exports are approximately 15m tons today) then we will see a scramble will occur with the domestics. If export prices are very high, then consumers here (mills) have to pay higher scrap prices and hence surcharges. Exports can really impact US supply/demand balance. Moss added that a weak dollar also plays a role (in increasing exports) and reiterated that utilization rates, shipping rates and the dollar in particular have a disproportional impact on prices. Harris clarified by stating he felt operating rates were les important and instead, the volume of exports impacted the domestics. For example, when exports were 5m tons/year, the scrap market remained on the coasts. When it went to 10 m tons/year, it started affecting inner mills/producers. When it went to 15m tons year, markets became export markets. When scrap exports reach 20 m tons, the market moves to parity and shifts to obsolete grades. Though Harris suggested no scrap shortages (he pointed to the 20+b tons of scrap the US has in its disposal he counted existing buildings in that number), many perceive a prime scrap shortage exists and has existed for the past 6-9 months. As scrap exports increase, we’ll see plenty of bilateral trade as the US already imports and exports scrap products.

In terms of a scrap shortage, we chuckled a bit at Harris’ reply that there is no prime scrap shortage. It reminds me of a rare earth metal debate where people argue, “there is no shortage of rare earth metals, which is true I suppose if you leave the economics out of the equation. The question becomes can one economically obtain rare earth metals and profitably sell them into the market. From this perspective, since many of the vacant office buildings and other commercial construction remains under water, it is not a given that scrap processors and dealers and just help themselves to that available 20b tons. We buy into the “perceived scrap shortage just based on historically lower automotive sales and folks hanging onto and repairing appliances (instead of buying new ones).

We will cover stainless/nickel and copper scrap markets over the next couple of days.

–Lisa Reisman

Spot steel prices have been rising in China driven by an expectation that supplies will be tighter in the fourth quarter and that mills will be pushing up prices. The country technically still suffers from over capacity but in a bid to achieve year end energy efficiency targets, Beijing has instructed 30 steel mills in Hebei province, home to many of China’s major steel producers, to cut output by up to 70% between now and the year end. Another 18 were told to close down for up to a month.

China’s installed capacity is believed to be about 740 million tons and the country is expected to make about 600 million+ tons this coming year. The government has long wanted to consolidate the industry into the hands of a few (largely state owned) champions but this is not the way to achieve that ambition. Judy Zhu of Standard Chartered Bank is quoted in a Reuters report as saying, “If you really want to remove capacity, you have to raise electricity prices and raise their (the mills) production costs to make them loss making,” adding that the orders in Hebei would shutter only 14.4 million tons in capacity, just 2.4% of countrywide production. Hebei’s production cuts follows moves by several other provinces, such as Zhejiang and Shangdong, to cut power supplies to steel mills to save energy, sparking a 16% surge in steel prices on the Chinese domestic market since July.

Even so, actual cuts may be less than anticipated. Apparently some producers simply switch from power supplied from the national grid to generating their own power. If the government is serious about capacity reduction the rest of the world will welcome the news. With so much over capacity China could have exported more than the current entire production of the United States, that she didn’t says more to the effectiveness of anti dumping threats around the world than to restraint on the part of steel producers.

The Chinese government is going to have to be more creative than simply issuing edicts that production must be cut. Smaller steel producers in particular are pretty creative in getting around regulations and continuing to produce. If prices rise as expected, the incentive for them to circumvent directives and continue producing will be that much higher. In a country that is already over producing that is bad news in the medium term as speculative stocks will build up in the supply chain. Meanwhile apparently steel producers share prices are on the rise as the market notes that a 2.4% drop in production coupled with a 10-20% hike in prices and falling iron ore costs equates to much higher profits. Looks like Beijing is on the steel makers side after all.

–Stuart Burns

We have seen a couple of reports in recent days providing conflicting signals regarding domestic steel prices. According to an IHS Global Insight report, prices will fall despite mills’ attempts to raise them. On the flip side, Steel Business Briefing has reported, “US prices could pick up near-term then slide into 2011. According to Josh Spoores of Cleveland-based Majestic Steel, as reported in Steel Business Briefing, due to “a combination of market conditions has him leaning toward a scenario of falling prices through year-end and into early 2011. We thought it might make sense to take a look at the raw materials markets for steel for price direction. Let’s start with China, home of half the world’s steel production. According to this recent story in Businessweek, imports of iron ore will likely “recover next quarter due to lower prices and depleted stockpiles will create the conditions for mills buy.

According to the IOSDA (Iron Ore & Steel Derivatives Association), both the iron ore swaps and spot markets ended last week lower. The chart below provides an indication of how the quarterly contracts compared to the spot prices:

Source: IOSDA

Though spot prices have declined somewhat, (3.12% for 62% Fe content), overall iron ore prices appear supported.

According to the Businessweek article, benchmark Chinese steel prices have gained 9.5% over the past 5 weeks to August 20. Our own MetalMiner IndX indicates the following price changes for China steel products from July 27 Aug 31:

HRC: .01% + change

CRC: .01% + change

Billet: .04% + change

Rebar: .03%+ change

Other indicators of rising prices include a rising BDI (Baltic Dry Index) up 59% since middle of July this year. Baosteel, according to this Reuters report said, “it would keep the prices of its major products unchanged in September, and other Chinese mills including Anshan and Wuhan Iron and Steel said they would increase prices due to anticipated demand.

Domestically, we have heard rumblings that demand remains fairly strong amongst key industry buyers, however, general economic data still suggests that demand may come off during the second half of this year. We still believe a double-dip recession may be in the cards by the time third quarter GDP data is released.

How do we read the signals? We believe it’s a bit too early to call a steel price drop. Stay tuned.

–Lisa Reisman

Disclaimer: MetalMiner has not discussed pricing trends with any of the mills mentioned in this article. The opinions in this piece are either attributed to other sources or our own.

ThyssenKrupp’s Alabama steel mill was always going to put pressure on incumbent domestic mills, bringing as it does some 5 million tons of capacity into the market. But when it was decided to proceed with the investment in 2007 the steel market was in bullish mood.

This Dept of Commerce chart shows how steel consumption had been running at high numbers in the years before and it wasn’t until a year later in mid 2008 when demand dropped off a cliff.

Combined with the Alabama plant is a Brazilian blast furnace and slab casting plant gradually ramping up to an eventual 5 million tons a year of slabs. “Only 3 million tons of this will be shipped to Alabama, the balance 2 million will go to ThyssenKrupp’s European plants. The Alabama plant consists of a carbon steel plant with a hot strip mill, which eventually will reach 5 million tons annual capacity, a cold strip line with 2.5 million tons, and galvanizing lines of 1.8 million tons according to a recent Reuters article. An adjacent stainless steel mill will start production in October 2010, initially with a reduced cold-rolled capacity of around 100,000 tons per year and expanding to a maximum of 140,000 tons.

In a market where producers are running at little more than 71% capacity and prospects are uncertain for the second half of the year, concerns are being raised that a price war will develop. Our expectation is that even with this new competitor in the market producers will continue to manage production capacity as they have done so successfully this year and will avoid depressing prices. Although the article states the expectation of Charles Bradford, an analyst at New York-based Affiliated Research Group that there could be a blood bath as incumbent suppliers cut prices to protect their market share, we think this is unlikely. Price have shown a small uptick over the last couple of weeks and we hold to our expectation that rising scrap prices will support a higher finished steel price by year end.

The expectations of price falls, on the other hand, won’t be helped by rumors that ArcelorMittal is looking to regain lost market share. US Steel and AK Steel are said to be the most vulnerable to competition from the new mill both in terms of product mix and fixed cost base. Nucor who is said to command some 75% of the market share in the area nearest to the new ThyssenKrupp plant has a greater portion of production in long rather than flat products and runs a leaner variable cost base operation that is better able to respond to price pressure from rivals.

Nevertheless, additional high quality competition of this kind will inevitably limit the ability of steel makers to raise prices over the next 18-24 months and however disciplined the mills are in managing their capacity will help to limit price rises for consumers. Consumers looking to fix prices going forward may be well advised to cover only part of their requirement. Global demand is weak from previously bullish China to sluggish Europe. Raw material costs appear to be abating (with the exception of scrap prices) and capacity utilization is still historically on the low side. On balance 2011 could be an interesting year for steel prices, much will depend on the strength of the continuing recovery in manufacturing.

–Stuart Burns

Last week a colleague forwarded me an article from BusinessWeek discussing the role of contango as it applies to ETFs. (Don’t worry – this won’t be a technical piece). In layman’s terms, the article examined how an underlying commodity price could increase whereas an ETF, invested in that same commodity, could go in the opposite direction. Hence investors have lost money by investing in the commodity ETF. The article suggests the issue involves a situation called contango. Contango refers to a futures price that is more expensive than the spot or near term contract price. For the most part, most metals trade in contango (in fact, we just recently reported that tin flipped and moved to backwardation the opposite of contango or rather when the spot price exceeds its futures price). Based on our analysis, the problem with ETFs is not so much due to contango per se, but rather when the funds futures contracts expire – they may have to purchase new futures contracts at higher prices. The same argument can be made for anyone buying futures contracts so the potential problem is not unique to ETF’s.

What is unique to ETF’s however, and subject to the controversy outlined in the BusinessWeek article (namely that some investors have lost money in ETF’s even as underlying commodity prices have increased) is that fund managers can only replace those futures contracts during the “roll period (that is, a set number of days that the funds can purchase futures contracts). And lo and behold, the prices for those futures contracts tended to go up whereas the futures contracts fell in price after the roll period. And other futures traders, according to the BusinessWeek article can “buy the next month ahead of the big programmed rolls to drive up the price or sell before the ETF pushing down the price investors get paid for expiring futures. This results in the fund essentially under-performing the actual market, particularly if it needs to re-purchase futures contracts at higher prices.

So how big of an issue is this? Well, that would certainly depend upon which commodities one has investments in and which ones are subject to these futures contracts. MetalMiner has tracked over 30 ETF’s considered to be part of the “metals space. But in actuality, only a couple of metals funds actually play in the futures markets. The first involves aluminum: the iPath Exchange Traded Notes Dow Jones – UBS Aluminum Total Return Sub-Index ETN Series A and the second, copper. Most of the other metals ETFs track to a sub-index off the futures markets but don’t actually take futures positions. We should note that platinum group metals ETF’s are actual physically backed ETF’s meaning the metals are actually warehoused.

Another interesting phenomenon that metals-based ETF investors will want to pay heed to involves the launch of physically backed ETFs. Both Glencore and Credit-Suisse have announced plans to create two physically backed ETFs to be launched still within this year. We will wait to see if either of these two funds actually come to fruition. Meanwhile, Goldman Sachs owns a global network of aluminum warehouses. The physically backed ETFs offer some risk protection in the sense that the funds can take delivery of material when they want and choose to do so and avoid the game of the “roll contracts.

MetalMiner has previously published a three part series on metals based ETFs. You can read those posts here:

A Primer On Base Metal ETFs

The Role of ETFS or ETNs on Base Metal Prices

Can ETF Commodity Backed Funds Be Used For Hedging

–Lisa Reisman

Recent smelter closures have seen global aluminum production drop in July for the first time since Q1. Output dropped to 112,000 tons per day in July from 114,100 tons per day in June according to a Reuters report. That equates to an annualized drop of 640,000 tons conveniently very close to the 700,000 tons predicted by us recently as the capacity in Henan province that had been earmarked for closure following government directives to close out dated, polluting and less efficient plants. In fact while most of the drop did come from China, it may have had more to do with low prices squeezing producers margins than the government directives.

At the same time exports from China have almost doubled this year to 1.03 million tons as a mix of primary metal chasing higher physical premiums and downstream semi finished products have found ready export markets. Some downstream products such as small extrusions still carry export rebates of 13-15% but volume bar and plates products had export rebates slashed last year and the only exports now are those miss-labeled as a finished product a frequent tax avoidance game played by Chinese exporters brave enough to take on the customs inspections at ports.

Bloomberg reported that China became a net exporter of aluminum for a second month in July as imports plummeted and exports stayed firm. The paper suggests this is due to falling domestic demand and it’s true to say inventory in Chinese domestic warehouses has jumped 65% this year as production surged to a record 1.42 million tons per month prior to the recent closures.

Outside of China, smelters in North America and the Middle East have closed following power outages. Rio Tinto Alcan’s Laterriere smelter in Quebec lost one of its two pot-lines last month following a transformer failure. Production could be down for weeks or months, details are almost non-existent. Likewise Norsk Hydro’s JV Qatalum smelter in Qatar experienced a power failure this month as it was ramping up towards its 585,000-ton capacity. How much of the plant has been effected is uncertain but estimates are up to 120,000 tons of production capacity down.

None of this seems to have impacted the price. Wider fears about growth in the US and China seem to be driving equity markets at present and the metals prices are taking a lead from that. If prices continue to slide towards $2000 per ton there will be less incentive for marginal capacity to be brought on-stream in China over coming months. In the medium term prices are expected to rise but in the short term the markets are looking rather uncertain.

–Stuart Burns

Metal is flooding onto the LME as if it’s being panic dumped and yet physical premiums are rising and the near term one month price is in backwardation. To understand what is going on we have to back track a little over recent months.

It is common knowledge that although LME aluminum stocks stand at some 4.47 million tons and that wider industry inventories as measured by the IAI stand at some 2.2 million tons, making the total nearly 6.7 million tons, the market is not as awash with aluminum as you would expect. Depending on who you believe, anything from 50 to 80% of the metal on the LME could be tied up in long term financing (or cash and carry trades) whereby a bank, hedge fund or major trader buys spot metal and sells 15-18 months forward at a premium in excess of the carrying costs, pocketing the difference. Relying as it does on the robust contango on the LME where far dated metal is priced above spot this game has been rolling on since the financial crisis hit, if not before.

That is not to say investors are all banking on the metal going up. Bear in mind they have sold forward so whether the actual price rises or falls is their buyers problem, not theirs. But of late, some investors have been betting on the price falling, taking out short dated positions selling forward a few months in the expectation prices would come off they hadn’t been reading our latest research. Anyway prices haven’t come off, they have risen and those investors have been forced to borrow metal to meet those sales or “puts” on the market. This usually involves buying physical metal and delivering it onto the LME, or buying warrants for delivery against those positions – hence Reuters recent reports reprinted everywhere you look advising of metal flooding onto the LME, over 70,000 tons this week alone.

Source: Reuters

This pushes up spot prices relative to just a week or two out as this graph from the LME shows and is the visible manifestation of all those short positions being desperately covered before they come due. The problem is just two parties are rumored (the LME loves rumors!) to hold between 30-40% of the material each. Barclays Capital (BarCap) is said to be one although they have declined to comment, but as one of the ring dealers with the highest credit ratings, they are well positioned to hold up to 2 million tons on behalf of their clients. With so much of the metal on the market unavailable because it is tied up on long term finance deals and if, as believed, two players hold such dominant positions then spot premiums for anyone needing metal today or tomorrow is going to be high. This is most starkly manifested in the tom/next premium, meaning metal to be delivered tomorrow against the day after. The tom/next premium this week has soared to US$8/day from a small discount a couple of months ago. Meanwhile large volumes are changing hands. On Tuesday of this week for example, 850,000 tons were traded on the tom/next premium, the sellers pocketed over US$6m in premiums alone for just that day’s trades.

On the other side of the fence there are also a limited number of key players. Bloomberg reports that three bets on lower prices each held between 10 and 19% of the August short positions. Ouch that’s a lot of metal to be on the wrong side of price-wise. Another three positions each controlled between 5 and 9% of short positions for the month. One party is said to hold 40% of the short positions expiring next month.

Nor are physical premiums in the wider market any less robust. The sudden shutdown of Norsk-Hydro and Qatar Petroleum’s new Qatalum smelter due to a power black-out has put back the ramp up of the smelter by months. If power is suddenly shut off, liquid aluminum solidifies in the pots and even if rapidly drained causes immense and highly expensive damage. Estimates put the loss of production at 100,000 tons this year and premiums for physical delivery in Asia have jumped 10% from last month already, even though China has adequate stocks and spot buys have been quiet for some months.

So will the short term backwardation on the LME disappear as quickly as it came? No probably not. It would appear those shorts extend into next month and worries about supplies have narrowed the one month contango from $30/ton last month to $10/ton this month. As the above graph shows, the long term contango remains sound and will still support the cash and carry trade but not by buying spot and selling forward, buyers will have to buy one-two months out to catch the low, further restricting supplies for those rolled short positions. All in all aluminum’s gravity defying ride looks set to continue as the supply-demand market moves to balance in the second half and the physical market continues to be tight.

–Stuart Burns

This is the second post of a two part series. The earlier post appears here.

Earlier this month, Aaron Kharivhe, a regional mines manager, sent London based miner Lonmin a letter ordering it to “refrain from selling nickel, copper, chrome or any other minerals other than platinum group metals with immediate effect. Like all other multi metal mines in South Africa, Lonmin had been selling byproduct metals those contained in the same rock as the principal metal being mined as a routine practice up to then. It is understood that the order was connected with Holgoun a company controlled by Sivi Gounden, a former government minister who applied for prospecting rights over a portion of Lonmin’s land in March 2009.

All foreign miners are required to have local partners under the country’s black economic empowerment (BEE) legislation. The government has said it wants all mining companies to have 26% of their equity held by black South Africans by 2014 regardless of whether they bring any managerial or economic benefits to the organization. It would not be surprising if companies favored granting equity to those with political connections under such rules, if you have to give away part of your company you want to secure something of benefit and political connections have always been paramount in Africa.

But choosing partners based on their proximity to political office reached such levels last week that Susan Shabangu, South African mining minister, was forced to rush out a statement saying, “I want to reassure stakeholders that South Africa is indeed a mining jurisdiction worthy of future investment, following uproar that ArcelorMittal appeared to be doing a deal with a shell company to circumvent its dispute with Kumba Iron Ore. Last week Mittal announced it would buy Imperial Crown Trading (ICT) for 800 million Rand (US$100 million) a shell company owning nothing other than recently awarded prospecting rights over 21.4% of the Anglo American subsidiary Kumba Iron oOe Sishen mine. ICT is controlled by a former government minister with connections to the president according to Times Live a local website and was unheard of before the surprise award was made during Kumba’s high profile dispute with ArcelorMittal over the price at which Kumba would sell ArcelorMittal SA iron ore. Passions were further inflamed when Sandie Zungu, a beneficiary of the BEE deal was heard to say it was “money for jam. The dispute has even added to calls for the mining and metals industries to be nationalized. Numsa, the National Union of Metalworkers of SA points out in the article that both Arcelor and Kumba were borne out of the un-bundling of Iscor (South African Iron and Steel Industrial Corporation) as it was first privatized and then parts sold to multi-nationals. The government stipulated two conditions at that time – first, that iron ore be supplied at a cheaper price (set at cost plus 5%) to ArcelorMittal and second, that ArcelorMittal supply cheap steel to downstream industries to bolster local manufacturing capability (one of the founding principals of Iscor when it was set up in the 1920’s). In Numsa’s opinion (and many others) however “ArcelorMittal has, abused its access to a cheap supply of iron ore by, in return, fixing import parity prices for steel in South Africa (and pocketing the difference).

The rights or wrongs of Kumba and ArcelorMittal’s pricing structures aside, the fear in South Africa is that decisions about BEE and arbitrary confiscation and transfer of mineral rights to companies with nothing more than proximity to those in power will scare off foreign investment that South Africa desperately needs. Support has come from some surprising quarters, the National Committee of the Young Communist League of SA (YCLSA) recently came out with demands for a law to prohibit politicians from taking part in business and said they would campaign to ensure that relatives of politicians are prohibited from doing business with government.

Maybe Mandela’s legacy of fairness and justice is not lost in South Africa but rather is being championed by a younger generation still full of idealism and a desire to build a better future.

–Stuart Burns

A remarkably bullish view of metals prices in 2012 is being put forward by Michael Shillaker, a metals and mining analyst at Credit Suisse, and reported in a Financial Times article. Mr. Shillaker feels the market is unduly focused on near-term slowing in China and the rest of the world when, in his opinion, China has merely bottomed out from the government enforced cooling cycle and the economy will start to accelerate again from the end of this year and throughout 2011.

Looking as much at shares as metal prices, although obviously the two are linked, he says the Chinese economy will be the next catalyst for the out-performance of mining shares, similar to those witnessed in 2001, 2005, 2007 and 2009. Not only will China increase demand through 2011 and into 2012, but demand “normalization in the rest of the world will add fuel to the fire. “We still think that copper will reach $10,000 a ton by 2012 and relatively simple supply-demand analysis supports this, he said. Including iron ore and coal in his discussion, Mr. Shillaker predicted share prices have considerable upside potential. “We believe there is 30 percent upside potential to current share prices for the miners into year-end and in some cases potentially more than 100 percent upside over the next two to three years, he is quoted as saying.

We are not sure we are that bullish across all metals. Copper demand fundamentals appear quite sound on the face of it.

Source: Reuters

Copper inventory has been falling for much of this year as this Reuters graph shows, even though this is usually the cyclical summer re-stocking period. The same article looks at the recent trend of falling Comex stocks in the US market which suggested the trend has already caught the attention of investment bank analysts, many of whom are now advising clients to look through the broader “risk on-risk off” macro trading picture and take strategic long positions to capitalize on the improving micro dynamics of the copper market. Analyst speak for “get over the short term worries and focus on the longer term” much as Mr. Shillaker is suggesting.

Other metals do not share the same robust fundamentals as copper, so although both equity and commodity markets are showing a lot of correlation, this is likely to be a temporary alignment and given some months and a return of risk appetite, those metals with the better supply-demand fundamentals such as copper, nickel and dare we say even aluminum, looking further out, will reassert themselves.

–Stuart Burns

According to a Reuters article, China is on track to produce a staggering 600 million metric tons of steel this year, up from last year’s record 568 million metric tons and six times larger than the number two producer Japan. The worry is the market may not be there to take it. China’s steel mills appear to be churning out steel more in a fight for market share than to meet buyers demands. The big state steel mills in particular are the most reluctant to cut production fearing they will lose market share to competitors, so instead they are cutting prices just as the third quarter contract iron ore prices rises hit the balance sheet, pushing up raw material costs.

Output in the first half of 2010 surged 21% to 323 million tons and output in July fell only 3.7% to 51.74 million tons, still above a 600 million ton annual average. In the meantime, Shan Shanghua, secretary general of China’s Iron & Steel Association CISA is quoted as saying, “we will see the market busy with de-stocking in this half (H2, 2010) and a lot of small mills will shut down.”   Profits at the major steel mills fell 37.8% in June on the month and are expected to drop further in July. In fact other sources are quoted as saying at current prices perhaps only Baosteel will eke out a thin profit, the rest will be in a loss making position. Recent stockpiles have increased by 39% since the beginning of the year to 10.3 million tons at the end of June.

At the same time, exports are rising and western steel companies are finding themselves under pressure. Chinese exports to the Middle East are rising again as the   Silk Road Economy blog describes, graph courtesy of SRE.

SteelOrbis reported that China’s steel exports were up massively in the first half of this year, by 15.25 million tons or 153% year over year but also quoted CISA’s expectation that the change in export rebates may limit second half exports of low value steel items. Conversely this could encourage exports of higher value steel items that are right in the sweet spot of western producers.

Meanwhile the market is well ahead of developments. Share prices of Chinese steel mills have already dropped more than the 19.6% fall in the Shanghai Composite. Shares of Baosteel and Angang Group have both fallen by more than a third since the beginning of the year, while those of Wuhan Iron and Steel have almost halved.

With the removal of export rebates supposedly hindering exports, at least of lower value volume items, rising stocks and a softening domestic market, China’s steel mills have to cut capacity before a chronic rise in inventory pushes prices even further into the red. It would seem even in centrally controlled China, Beijing is not able to control the state steel mills as it would like. With such a lack of discipline, prices could fall further and then export rebates or not, more metal will come onto the world market.

–Stuart Burns

1 980 981 982 983 984 989