Articles on: Metal Prices

As former aluminum traders (meaning Stuart and I have bought and sold a range of semi-finished aluminum products on our own account) we can never stray too far from the base metals. Where the base metals markets will go, nobody knows for sure but that hasn’t stopped us from trying to better understand the fundamentals and demand drivers. MetalMiner price forecasts and any commentary relating to where base metals markets may go remain the most popular content on this site.   We’ve summarized a few of those key pieces here to bring you up to speed in case you missed the original posts:

Aluminum Consumption Projections for China 2010 and Beyond

Zinc and a Crystal Ball

Copper:   How Much Further Does it Have to Fall?

Lead Production, Demand and Prices Part One

Lead Production, Demand and Prices Part Two

–Lisa Reisman

Earlier this week we presented a couple of points of view regarding the role of urbanization in China and how that trend relates to growth of aluminum end use markets. In that post we cited three speakers from the recent 3rd Annual Harbor Aluminum Conference here in Chicago. Two of the speakers we covered and today we’ll endeavor to cover the third, the host presenter, Jorge Vasquez of Harbor Aluminum. For those of you who have never seen or heard Jorge speak, I have to tell you, he is quite a speaker. I have not seen anyone conduct the type of technical analysis that Jorge conducts. That isn’t to say that we agree with all of his findings but if anyone has sliced and diced the aluminum market, it’s Jorge. Jorge points to the notion of resiliency within the Chinese market to help explain that country’s growth story. He cites a variety of indicators from plain old strong domestic growth to a central government that acts swiftly and doesn’t “dither [our words, not Jorge’s]. In addition, he points to a high household savings rate of 40%, low public debt levels (despite the story we ran yesterday to the contrary), the fact that China remains a net external creditor and China’s huge international reserves.

All of these factors, Jorge believes, have allowed China to remain strong. In addition, and perhaps most controversially, Jorge takes an alternative point of view when it comes to China’s housing bubble. In particular, he believes that rising home prices in China are due to sales (not housing starts) and that China has put in place a number of measures to curb the speculative aspects of the housing bubble. He specifically cites the fact that banks have been banned from providing loans to speculative developers (those holding back sales of apartments in the hopes of waiting for higher prices or hoarding land), a new 5.5% tax has been levied on a buyer if a house was sold within the last five years, the announcement of a prohibition of banks providing loans for third home purchases and a couple of other measures designed to curb speculative behavior within the housing market. Jorge believes these measures have all lead to a bear property market in Shanghai since last year. He goes on to suggest that China has in fact chosen to pursue a path of more sustainable, moderate growth and the data seems to support that conclusion.

So what does Jorge conclude about China’s aluminum market? He summarizes three trends as follows: the first is that China is a net importer of raw materials and scrap. The second trend is that China is more or less balanced in primary aluminum despite astronomical output growth rates and China has become a net exporter of downstream products (e.g. bars, rods, profiles, wires, tubes, pipes, sheet, plate, strips and foil). He also points out that China remains one of the highest cost producers of primary aluminum at $2300/ton primarily due to China’s energy dependence but also the revaluation of the RMB. That cost structure creates difficulties for China to compete in primaries on the global stage. The Chinese government has put in place a range of export tax VAT schemes to promote the exports of semis. These include full 13% VAT rebates on tubes and pipe and foil and an 11% VAT rebate on plate, sheet and strip. These rebates neutralize any taxes, thereby giving China producers a leg up in export markets.

In sum according to Jorge, China appears to be moderating growth, promoting semi exports (and will gain market share), will continue to urbanize and drive up commodity prices and will remain a bullish factor on the LME.

–Lisa Reisman

Though we at MetalMiner tend to spend quite a bit of time talking about primary metals markets, the discussions and updates from industry participants in downstream markets offered to attendees at last week’s 3rd Annual Harbor Aluminum Conference provided some interesting insight into demand. Two of those end use segments we’ll examine today and these involve the aluminum extrusion and can sheet markets. We’ll start with aluminum extrusions. Lynn Brown, of Hydro shared a mixed bag of news covering the extrusion market. In particular he demonstrated the 50% drop in demand between 2008 and 2009 and went on to describe the extrusion market’s biggest end markets building and construction (55%) and transport (24%) with both markets still in recession, particularly trailers and semis (down from 300,000 units annually to 100,000 forecast for 2010).

Although both the building and construction and transport markets remain in recession, Hydro sees some positive signs. In particular, Lynn sees some progress on China extrusion anti-dumping cases, industry rationalization and capacity reductions and some growth coming from the solar/photovoltaic cell and wind markets. In addition, much of the building and construction demand works on a build-to-order model that favors domestic producers. And for the transport market, the domestic industry extrusion producers benefit from the JIT environment in which parts and components must ship. As another boost for extrusion growth, Hydro stated that 29 states have mandates to obtain minimum percentages of energy   from renewable sources which ultimately come from new projects for which extrusions play a role. The negative story, however, remains firmly in place¦a sluggish transport market (despite the move toward lighter/stronger vehicles typically a good sign for aluminum vs. steel) and what Hydro calls “The China Factor specifically the growth of Chinese extrusion market share in the US from 6% in 2006 to greater than 20% today. In sum, the extrusion market remains a mixed bag.

Contrast that end user industry with the can sheet market and the picture looks altogether different. According to Joe Sasso of JAS Consulting (Joe came from Rexam), the can sheet market operated at a fairly steady Eddy pace declining only 1.6% in 2009 from the previous year. The aluminum can market at just under 100 b pounds annually is expected to grow by 3.1% in 2010 according to Sasso. The main news within this end market involves the shift in supply from the domestic mills between 2009 and 2010. In particular, Alcoa and Novelis had the largest market share followed by Wise Metals and ARCO. In 2010 however, Wise takes a much larger market share by obtaining Anheuser-Busch volumes while exports have declined.

A second shift within the can sheet market involves pricing and the perceived balance of power between the can sheet mills (e.g. Alcoa, Novelis, ARCO, Wise etc) and the can makers (e.g. Crown, Rexam). The shift, like many in the metals industry, involved the nature of previous long term contracts in which one side ended up absorbing rising raw material costs while the other side had “locked into a longer contract. The balance of power has now shifted from the can makers back to the can sheet mills. When the old contracts expired, the can sheet producers moved off formula contracting toward ingot, conversion pricing and pass-throughs, much like many of the other metal industries we cover.

We will endeavor to continue covering aluminum downstream product markets.

–Lisa Reisman

Yesterday I had the pleasure of attending the 3rd Annual Harbor Aluminum Conference right here in Chicago. The conference runs for another half day but so far the content has been superb. We will write a series of posts on the aluminum market covering the following: a price outlook and forecast, the role of urbanization in China and what it means (or does not mean) for aluminum growth, a piece on the Middle East, perhaps some additional supply and production trends and an analysis of several key end markets including extrusions, can stock, automotive and housing sectors (e.g. flat rolled products). Jorge Vazquez, Founder and Vice President of Harbor Aluminum Intelligence Unit kicked off the day with several interesting points. We’ll summarize a few of those here.

The first interesting comment Vazquez makes involves the correlation between the VIX (the Fear Index) and global aluminum apparent demand. He notes when confidence is up, the demand side of the aluminum equation functions properly. He proceeded to show a graph depicting the correlation between what the VIX does and aluminum demand (they move in tandem). He goes on to show the somewhat close (I wouldn’t use the word tight) but somewhat correlated look at the VIX against Aluminum LME 3M prices.

The second point to note involves the role of speculative buying specifically Vazquez makes the case that this type of buying played little to no role in the price rise for aluminum seen earlier this year. Instead, market fundamentals including global visible inventory and real LME 3 month prices are tightly correlated. We can see this within a five year analysis (though it becomes even more obviously using a 20 year analysis):

Other key points Vazquez makes involve aluminum industry growth rates. He claims underlying demand is growing at the highest rate since 2004 and LME aluminum inventory has declined in both Europe (more noticeably) and the US. In addition, aluminum scrap markets appear tight with US scrap levels falling and China buying up as much aluminum scrap as it can from the US.

We at MetalMiner spend quite a bit of time talking about “variables that impact pricing. Vazquez offered up several warning signals that his firm examines to gauge downward price direction. We won’t list all nine of the warning signals here (you can get that by subscribing to their reports) but several have been “turned on in recent months. These include: the USD closing above the 200 day “EMA (Exponential Moving Average) two weeks in a row, the Shanghai stock market in a bear mode, oil prices closing below the 200 day EMA and aluminum prices closing down below the 200 day EMA. Currently four of nine signals are turned “on.”

Where does that leave the market from a price forecast perspective? Vazquez didn’t call out specific price ranges but Mark Liinamaa, from Morgan Stanley did. He predicts a Q3 price drop (which also has historically proved to be the weakest quarter for metals demand according to Liinamaa) but with Q4 prices will reach $2100/ton, provided the economy does not double dip. Liinamaa echoed many of Vazquez’ findings particularly around absolute inventory levels, “they have dropped substantially since September 2009. His other comments relate to China which we will cover in a follow-up post.

–Lisa Reisman

Here are four steel news items I have collected in my “steel blog fodder file. Individually, they don’t seem to say much, but altogether, the data appears quite interesting. Here are the news items:

  1. China’s largest steel producer, Baosteel will, “likely cut production in the third quarter because of “weak demand from the auto and appliance markets, according to Baosteel Group Chairman Xu Lejiang at a Bloomberg Businessweek Green Business Summit in early June. Industry analyst Michelle Applebaum expressed similar sentiment on June 8 in a research report, “Chinese production cuts will accelerate quickly. But the proof will be in the pudding, as they say.
  2. Though our earlier steel vs. copper post today commented on a Credit-Suisse report earlier suggesting, “On the cost side, steel-making costs are in part driven by the location of the mill, so developed-world steel makers will naturally have a higher fixed cost base relative to developing world peers. As such the cost curve is in favor of developing world producers, we’d take argument with that conclusion for a whole host of reasons.   Chinese integrated steel production is likely more costly than some Western producers for reasons relating to availability of supply of key raw material inputs (e.g. coking coal and iron ore) which adds greater price volatility. In addition, freight can make a huge difference in a producer’s cost structure. According to one domestic EAF producer, “…freight in and out is ultimately borne by the consumer. Within the last 2 years, trans-oceanic freight haulage costs reached a peak of $80+/ton and with current costs of ~$35/ton. China, a developing economy imports huge volumes of raw materials from Australia and Brazil. Brazilian producers have raw materials in their back yard. Developing world producers are likely to be less efficient and see higher costs on other aspects like energy, transportation and such. There are too many variables involved to make a broad statement such as “the  cost curve is in favor of developing world producers.” We would concur. In addition, domestic mills, particularly several of the mini-mills, are often strategically located to both raw material sources of supply (and customers) that result in lower delivered costs to the consumer. Here at MetalMiner we advocate total landed cost and total cost of ownership, not lowest steel price per ton!
  3. According to a presentation from Steel Market Update two nuggets of data caught our eye. The first centers around this question:
    1. “Is your company building, reducing or maintaining its flat rolled steel inventory? As part of a regular survey conducted by Steel Market Update, only 3% of service centers are building inventories whereas 0% of manufacturers are building inventories. The number of service centers reducing inventory has grown from 20% a month ago to 45% in June and the number of manufacturers reducing inventory has grown from 13% in May to 30% in June. The second data nugget involves number of months of supply
    2. Fully 83% of survey respondents are now holding less than 3 months inventory. Both nuggets of data suggest that steel demand has stymied somewhat (also reflected in significant steel price drops for HRC -4%, CRC -5%, standard plate -1% with only rebar holding steady Source: Steelbenchmarker) These “signals suggest the shift in mindset from building inventory to reducing inventory will put further downward price pressure on steel.
  4. The trend line for forward contract price curves for iron ore appeared in a downward slope though prices have ticked back up this past week according to the Iron Ore and Steel Derivatives Association (see graph below):

Graph Courtesy of: IOSDA (Iron Ore and Steel Derivatives Association)

Buying organizations should pay very close attention to demand signals, particularly the trend lines in terms of whether or not service centers and manufacturers are shedding inventory vs. building inventory. Forward price curves provide additional cues. In falling markets, for any purchases not under long-term contract, buyers may wish to consider making last-minute buying decisions to capture additional savings.

–Lisa Reisman

Join us for a FREE heat treat plate market webinar on June 24, hosted by Leeco Steels. The webinar will provide educational information on the heat treat plate market as well as cost reduction ideas, market dynamics and supplier lead times and capacities. Click here to register

In a recent note to investors on equity investments in the metals and mining segments Credit Suisse made a very interesting analysis as to the relative merits of investments in steel and metals as opposed to mining companies producing the raw materials that go into those industries.

The bank states that commodity demand is back to where it was in volume terms before the crash of 2008. For example in 2007 the world consumed around 18mt copper split 5mt China 13mt ex China. Now its around 7mt and 11mt – same global size very different split. Globally, steel production is back to pre-crisis levels but again capacity under utilization in the west has been compensated by significant new capacity running at higher levels in Asia.

Data from Worldsteel replicated by Credit Suisse

The bank observes that mining is largely a global market whereas steel is a mixture of regional and global. Some specific observations are:

  1. On the cost side, steel-making costs are in part driven by the location of the mill, so developed-world steel makers will naturally have a higher fixed cost base relative to developing world peers. As such the cost curve is in favor of developing world producers.
  2. On the metals / mining side, other than processed metals such as aluminum, costs tend to be where the deposits are found (generally low cost nations) or in minerals such as iron ore, the grade and quality is the key driver of the cost, not the cost of the labor base.
  3. On the revenue side, in general non ferrous metals trade at a global price, often linked to exchanges such as the LME
  4. Steel pricing is far more opaque and regionally driven. While the effective regional “spot price is more or less a global price driven by the US$ export price; local contract pricing (and in the developed world up to 50% of steel is sold on contract) will be dependent upon customer relationships and burden sharing, as well as domestic utilization rates.

Because steel mills ex China are typically running at only 75% capacity they have limited ability to pass on rising raw material costs. If as expected China returns to steel growth next year this will maintain upward pressure on raw material costs and downward pressure on global steel prices. This will apply for all products where China has a surplus such as aluminum, steel and stainless, the upside for finished metals prices remains limited.

As this graph shows steel prices have consistently underperformed relative to copper prices during the last five years, and producers earnings would reflect this.

Data from Worldsteel replicated by Credit Suisse

The analysis was run to illustrate the advantages of investments in mining companies rather than steel companies but the conclusions apply equally to probable moves in metals prices. Even if Asian demand drives prices for iron ore, coking coal and so on higher it will not automatically lead to equivalent price rises in finished metal costs. For products like steel producers in the west, suffering from over capacity will be the one’s squeezed but for metals like copper, that are globally priced, price increases will pass directly through to consumers.

–Stuart Burns

Egypt final lost patience with the world’s number one steel maker this month and issued them an ultimatum to either start construction on a proposed new steel mill or lose the license. Amid much fanfare back in early 2008, ArcelorMittal beat India’s Essar Global and al-Ghurair of the United Arab Emirates in an intense and lengthy auction to be awarded a license to build a steel pelletizing plant and billet production facility. Egypt’s rationale was to lower domestic steel prices by boosting the backward integration of the industry into early stage products not at that time produced in the country. It was believed that by producing Direct Reduced Iron pellets and basic billets domestically, Egypt could avoid imports and lower costs. Egyptian housing and real estate companies were expected to benefit from the new capacity, which would ease prices for a range of downstream products but particularly steel rebar, Egypt’s Commercial International Brokerage Co. is reported to have said in a Reuters report at the time. The industry believed that Egyptian steel producers, currently dependent on imported intermediate products, would also benefit from cheaper locally produced DRI and billets.

The license was therefore to build a 1.6 million ton DRI plant and a 1.4 million ton billet production facility at a cost estimated originally at somewhere between $800 million and $1 billion. Egypt is the Middle East’s most populous country and its construction industry has held up surprisingly well during the global downturn. However, in the intervening years the industry has had to continue to import rebar and pellets because ArcelorMittal has not followed through with the construction of the plant. The firm blames the global downturn on its repeated delays but in practice the domestic Egyptian market has been more buoyant than many other parts of the world and ArcelorMittal’s decision can only be seen in the light of a global reduction in capital expenditure rather than the economics of the local market.

That is scant comfort to the Egyptians however who had expected the steel producing facilities to be up and running by now, so according to a Reuters report the authorities have issued an ultimatum break ground by August or have your license revoked. The steel giant while heavily impacted by the downturn and still running at way below capacity see our recent article on the top ten steel producers, ArcelorMittal produced only 73.2 million tons in 2009 compared to 103.3 million tons in 2008 is not short of cash and its shares are riding high so the firm will find it hard to postpone construction beyond this year.

If it is any consolation there are probably many steel mill projects still on hold around the world but it is only in smaller emerging markets where the presence or absence of one facility can have a significant impact on the cost prices for a whole economy that such delays are most keenly felt.

–Stuart Burns

With the greatest respect to Roger Agnelli, chief executive officer of Brazil’s Vale, he may head up the largest iron ore company in the world but how he keeps a straight face sometimes begs an answer. In a recent Reuters article, Mr. Agnelli is said to have warned that reducing, or heaven forbid removing, import taxes on steel products would weaken Brazilian steel producers and could have very serious consequences for the domestic market. Hold on a minute Mr Agnelli. Brazilian steel producers are said to be (literally) sitting on top of some of the lowest cost and highest grade iron ore and coking coal deposits in the world. As a result of the vertically integrated nature of domestic producers, Vale itself only sells about 10% of its production in the domestic market. Along with Russia, India and Ukraine, Brazilian steel producers are said to have some of the lowest power costs. They are also blessed with a robustly growing domestic steel market that would be the envy of steel producers in Europe or North America, ensuring they are running at or near capacity. Last but not least they are partially protected by the comparatively higher cost of freight foreign producers have to pay just to ship to Brazil in contrast to producers in Europe or the US who face freight rates that were so low last year some shipping lines were on the verge of bankruptcy. The only factor counting against domestic steel producers is the strength of the Real, which makes imports more competitive than they would have been historically raw material costs being constant.

The authorities threat to remove the import tariffs is not unreasonably driven by the rising price of steel in the domestic market, rises that the government claims are helping push inflation to 5.3%, above the governments 4.5% target. Yet domestic steel producers like CSN and ArcelorMittal are said to be raising prices this month by 10% or more such that now they are some 40% above the world market price according to this article. Although steel imports into Brazil surged to 1.8 million metric tons in January-April 2010, up 156% from the same period in 2009, it has to be said that if prices are that much above world prices the benefits to Brazilian steel consumers of lower prices far outweigh the perceived threat to Brazilian steel producers and on balance the economy would be much better off with lower steel prices.

Domestic producers have vigorously defended the import duty of 15%. Its legitimacy going forward comes down to how steel prices in Brazil compare with those abroad. If the above statement is correct that prices are significantly higher then you have to ask yourself why producers need an import tariff. Surely with all the advantages open to them, Brazilian steel producers should be some of the lowest cost in the world and be able to compete with anyone. Of course if producers consider one or two countries are dumping steel in their market then they have every right to lobby government for anti dumping duties on those mills or countries, a tactic used with considerable success in the US and Europe. The steel industry is a powerful lobby in Brazil, whether any change to the tariffs will take place remains to be seen, but meanwhile on the face of it defense of them has a hollow ring.

–Stuart Burns

This past week (specifically, on June 10) I received a metals report dated May 2010. And though the dates were slightly incongruous, the report piqued my curiosity. I always like to see what other organizations (and even competitors) report in terms of metal price forecasts. What immediately caught my eye with this particular report relates to the price direction it gave for four metals markets, specifically steel, copper, aluminum and nickel. Oddly enough, the price arrow direction pointed upward for all four metals! Hmm¦that clearly doesn’t square away with much of anything we have reported or seen lately. So what gives?

The report outlines several data points for each of the above-referenced commodities. Here is a sample of a few key points that I found striking:

  1. Copper “Copper prices rose on improved fundamental demand in March
  2. Steel “Manufacturing sector demand increased, non-residential construction falls
  3. Nickel “Nickel prices climbed higher on rising demand and higher scrap prices
  4. Aluminum “Aluminum prices climbed higher on rising demand and higher scrap prices

We couldn’t quibble with the findings had the report been dated April 2010 (and therefore released in April), but with the exception of some current commentary on the steel market, specifically that steel prices could temporarily fall if demand pauses and imports increase (both of which we have reported as happening), we have to question the value of reports like these. For example, if the report had gone out with a “promotional material only — current issue available via subscription caveat, then certainly this rant would be unjustified.

But as we like to say, “looking at yesterday’s weather forecast won’t tell you what to wear tomorrow, (unless you live somewhere tropical). Historically, rear view mirror analysis and data points will tell you nothing about tomorrow’s market direction. And though we don’t want to destroy our own integrity by stating how MetalMiner examines the market and makes price forecasts (click on the link above to see our philosophy), we would argue that metal sourcing organizations need to ask themselves: does it make sense to analyze historic information in an attempt to understand future scenarios? Or, does it make more sense to analyze current market variables, their volatility and direction, and assign weights to those variables and attempt to make sense of future price forecast scenarios?

We’ll let you make that call.

–Lisa Reisman

Join us for a FREE heat treat plate market webinar on June 24, hosted by Leeco Steels. The webinar will provide educational information on the heat treat plate market as well as cost reduction ideas, market dynamics and supplier lead times and capacities. Click here to register

The aluminum market is in a state of balance, or one might say on a knife edge. You may find that a strange statement to make, from a supply-demand point of view the market is clearly not in balance, nor has it been for the last few years. One only has to look at the rising stocks levels or read these columns to know global aluminum stocks are at record levels. Some 4.5 million tons on the visible LME, over a million in western world un-wrought inventory according to the IAI and SHFE stocks at record highs, having risen by nearly 200,000 tons this year alone according to Reuters. New and idled production have continued to come back on stream, first in Asia with capacity in China, India and the Middle East rising, then in Europe particularly from Rusal. See this Reuters note and graph:

We recently wrote about power cost increases in China and the possible impact this could have on China’s metals production in general but aluminum production in particular. In itself, rising power costs wouldn’t have been a major issue for Chinese smelters as prices prevailed during the first quarter but since then prices have fallen by some 25% to below US$1900/ton although they have since recovered slightly to the low $19o0’s today. Even so, a SteelGuru article makes the point that smelters connected to the national grid in China have a cost of production of over US$2000 per ton while integrated smelters may be only $100 per ton under this. That places many of China’s smelters at or even below their cost of production and could force closures this year if the higher power tariffs are maintained as seems likely during peak summer power periods.

Indeed Oleg Deripaska, Rusal’s CEO and largest shareholder made the point in a Financial Times article this week   saying “If the aluminum price is still at this level at the end of the second and third quarters, we will see 2m to 3m tons (of capacity) shut down, all around the world.”   That would represent about 8% of global production, which stood at 37m tons in 2009, but more importantly would be enough to bring the supply demand situation back into balance.

Some would argue it would push the aluminum market into sharp deficit because even though production has been exceeding consumption much of the excess has gone into long term financing deals and in practice physical metal has been in comparatively short supply, as evidenced by the rising spot premiums being paid in Asian markets such as Japan.

This assumes the financing deals continue but recent trends have suggested they are coming to an end. The forward price curve for aluminum has flattened as this graph shows:

The difference between the 15 month forward price and the spot plus the premium required for physical delivery is only about $100 per ton or 5% which is not enough to cover interest, insurance and warehousing for 15 months. It was $200 per ton or 8-9% last year. So if financing is in decline and production is significantly reduced in H2 2010 the whole supply-demand balance will be different. A lot of metal currently on long term deals will gradually come back to the market as those deals mature but with production down it’s possible this could be absorbed without further price destruction. Does this signal further price falls or a support level for the aluminum price? We suspect aluminum is nearing the bottom but it will be an interesting next few months.

–Stuart Burns

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