Articles in Category: Supply & Demand

Rising oil prices were seen last year as a positive result of growing global growth and recovery, but a combination of factors are turning this benign view into a more sinister scenario.

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On the supply side, the combined efforts of OPEC and Russia, leaky as the agreement has been, have managed to reduce the global oil surplus in just 18 months to bring the market largely into balance. As a result, oil prices have gradually risen during the period. It’s a trend most observers have been sanguine about, believing the U.S.’s tight oil producers, encouraged by rising prices, will increase output to ensure ample supply and keep a lid on oil prices getting ahead of themselves.

But that benign view had not taken account of President Trump’s decision to rip up the Iran nuclear deal and, as a result, to reinstate sanctions, a move that will take place in two phases to give firms time to adjust.

According to The Telegraph, this will be done in two stages, on Aug. 6 and Nov. 4, allowing 90- and 180-day wind-down periods. In addition the Treasury is to re-list Iranian individuals and entities in the Specially Designated Nationals (SDN) list, thus revoking special licenses and exceptions previously granted to individuals and companies to deal with Iran, making it all but impossible for firms with a U.S. presence or needing dollar clearing to deal with them.

Lastly, Iran’s crude oil sales will be limited under the National Defense Authorization Act of 2012, as the U.S. departments of State, Energy and Treasury will allow ongoing but reduced purchases of oil from Iran, termed “significant reduction exceptions” on a country-by-country basis if they demonstrate a commitment to substantially decrease oil purchases (usually at least a 20% reduction).

As a result, Iran’s exports this year are likely to take a 500,000-barrel-per-day hit, from the country’s roughly 2,200,000 bpd current exports. The Telegraph speculates this could rise to 750,000 bpd next year as sanctions bite deeper.

Iran is not the only threat to supply. The ongoing implosion in Venezuela’s output, as spare parts run out and infrastructure collapses, also figures into the equation. So far, this has taken some 700,000 bpd out of global markets, the news source reports, with no sign of the trend slowing and no quick fix, even if a revolution overthrows the Maduro regime.

Meanwhile, the global oil industry investment collapse since 2014 following the plunge in oil prices has, like a juggernaut, taken time to impact output.

Output from conventional projects has until now been rising as projects started at the beginning of the decade have come onstream, but the cycle is turning — The Telegraph reports output will fall precipitously, by 1.5 million bpd in 2019.

So, what of all that replacement supply from the U.S. shale market?

Rig counts have predictably risen and output is up, but both U.S. tight oil and the Alberta tar sands are facing an infrastructure squeeze. Limited pipeline capacity and the failure to build new ones is holding back supply from the West Texas and Tar Sands regions. The U.S. is now becoming the world’s largest oil producer, on target to produce 12 million bpd next year by Energy Information Administration (EIA) estimates. However, that will not insulate the U.S. from higher oil prices, as the country is now exporting significant quantities of distillates and growing volumes of crude.

Saudi pledges to maintain stability in the oil markets should be taken with a pinch of salt. They have equally said they do not see any problem with a $100/barrel oil price and so are unlikely to raise their own production to ease the pain for everyone else until prices are well into triple digits.

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The Telegraph quotes Westbeck Capital, which says “We believe an oil price shock is looming as early as 2019 as several elements combine to form a ‘perfect storm’,” predicting $100 crude in short order, with $150 coming into sight, as the world faces a crunch all too reminiscent of July 2008.

Lithium batteries. konok1a/Adobe Stock

We normally associate Cornwall in England with scones and cream teas … or, if we are really metal nerds, we associate the sometimes sunny southeast country of the British Isles with mining (particularly with tin mining).

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The area dominated with igneous morphology has been mined since Roman times for tin, copper and a number of other metals.

But one metal, not surprisingly, that has never featured is lithium. I say “not surprisingly” because up to the end of the last century, it barely featured as a metal of value.

Nickel metal hydride batteries dominated the small appliance world and lead acid still served the rest. This century has seen an exponential growth in the use of lithium-ion batteries, from iPhones to electric cars to massive storage barns. The growth has been such that fears are mounting of a market shortage in the next decade, fueled in no small part by state support for electric vehicles (EVs) in Asia.

In fact, so urgent has the situation become that Chinese and Japanese battery makers are quietly buying into or buying up lithium deposits around the world to ensure they have secure supplies.  Currently, Europe consumes around 25% of the world’s lithium, but is dependent on imports from Australia, Chile, Argentina and China.

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As my colleague Fouad Egbaria wrote last week, the U.S. administration’s relaxation of the timescale for implementation of sanctions against Rusal has had the effect of taking the panic out of the market. As a result, prices have fallen for several days, not just for aluminum but for other metals that the market feared could face the same threat — most notably nickel, in which Russian oligarch Oleg Deripaska has an interest.

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But the vagaries of Washington policy aside, the underlying fundamentals for the nickel market remain firm.

Global Nickel Production and Usage Projected to Grow This Year

Reuters reports that according to the International Nickel Study Group, world stainless steel melting production rose by 5.8% last year, while projecting that global nickel production and usage is expected to rise to 2.344 million tons (MT) in 2018.

In terms of tonnage, world nickel production is expected to grow from 2.07 MT last year to 2.22 MT this year, while usage is expected to increase from 2.19 MT in 2017 to 2.34 MT in 2018.

As a perspective on fundamentals reasserts itself, the nickel price has recovered, rising back about $14,000 per ton. Demand has remained robust among stainless producers, with production forecast to rise 4% this year to over 52 million tons, while fears remain around supply.

Philippines Industry Aims to Navigate Government Land Regulations

The Philippines was top supplier to China last year, but the government of President Rodrigo Duterte is not letting up on its efforts to curb environmental damage from the extraction industry and threats remain of nickel mining being curtailed.

Nickel Asia, the Philippines’ top nickel ore producer and operator of the only two nickel smelters in the country, is quoted by Reuters as saying it intends to ship 20 million tons of ore this year — up 17% on last year.

But the government is limiting the amount of land miners can develop at any one time in a spur to rehabilitate old workings.

The limits are highly restrictive, amounting to only 100 hectares for mines producing 9 million tons or more, or 162 hectares if the project has a processing plant on site. The biggest of Nickel Asia’s mines covers 5,000 hectares and even the smallest covers 700, so it will be interesting to see if the firm manages the expansion in output it is projecting.

Indonesian Output on the Rise

Output in Indonesia is recovering following a lifting of the 2014 ban. The country has reasserted itself as the No. 1 supplier to China in the first half of this year.

The ban was lifted partly as the country looked to make up for the loss of revenue when exports collapsed and partly as firms invest in the downstream processing the ban was intended to force through.

Further increases in output, however, are limited, and investment in new reserves has been poor, while the nickel price was lower over recent years so the ability of the market to respond to predicted increases in demand from electric car and battery makers is in question.

The Outlook

We could see a growing divergence in nickel prices with standard nickel stainless melting grades remaining firm in the short to medium term, but battery Grade A, high-purity nickel premiums rising strongly if demand materializes as expected.

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Supplies of such high-purity nickel are limited, with only major producers like BHP Billiton, Norilsk Nickel, Vale and Sumitomo able to supply.

gui yong nian/Adobe Stock

Before we head into the weekend, let’s take a look back at the week that was with some of this week’s stories here on MetalMiner:

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  • What’s going on with steel prices? Have they neared a top? MetalMiner’s Irene Martinez Canorea offered her analysis on the subject earlier this week.
  • Also on Monday, MetalMiner’s Stuart Burns touched on aluminum prices, which have been on a wild ride the past couple of weeks with the announcement of sanctions on Russian companies and oligarchs, and then again when the U.S. Treasury opened the door to the potential easing of said sanctions (including against Russian aluminum giant Rusal).
  • India is looking east for its exports.
  • President Donald Trump and Saudi Arabia are at odds over the oil price.
  • Following up on the earlier post, Burns covered the subsequent drop in aluminum prices on the heels of the Treasury’s announcement.
  • The European Steel Association hopes the E.U.’s steel safeguard measures prevent a “surge” in imports.
  • Like aluminum, the nickel price also dropped significantly earlier this week.
  • The Aluminum Association urged President Trump to grant quota-free tariff exemptions — with respect to Section 232 — to “responsible” trading partners, calling for specific action to address Chinese overcapacity.
  • MetalMiner’s Sohrab Darabshaw offered the latest update on the bidding process for the bankrupt Indian firm Essar Steel.

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What goes up must come down, goes the old adage.

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Although that adage does not always hold true, it has for aluminum this week following a change of tone from Washington.

According to the Financial Times, the U.S. Treasury made two important announcements this week, the first being that if Oleg Deripaska sold his stake in Rusal, it could cut or lift sanctions on the firm. The second announcement was a postponement until Oct. 23 for U.S. firms and those dealing with them to wind up their affairs with the aluminum producer.

As a result the perceived tightness created by Rusal effectively being frozen out of the market has evaporated — for the time being, at least — and the price has fallen back to the high $2,200’s, some 10% above the level aluminium was at before the sanctions were announced.

The Treasury’s move is seen as an acknowledgement that it misjudged the impact on America’s own aluminum market and the damage such a disruption to the supply chain was going to cause.

Not only did prices react strongly, but primary and downstream supply became extremely problematic, with some consumers unable to access metal and smelters questioning where they would source alumina. Alumina prices reacted even more sharply than aluminum, rising as much as 80% since the sanctions were introduced.

Treasury Secretary Steven Mnuchin was at pains to explain the target was Oleg Deripaska, not Rusal per se, and is hoping the latest move will drive a wedge between him and the company, allowing U.S. consumers to continue to access Rusal metal while achieving the original objective of penalizing Putin supporters.

The FT reports Deripaska controls 48% of the company, with another 26.5% owned Viktor Vekselberg (who was also on the sanctions list) and some 8.75% in the hands of Glencore.

The Treasury’s move may negate the need for Moscow to nationalize Rusal. While not openly admitting that option was on the table, it has been rumored and may yet be an option if Deripaska decides his only option is to exit from the firm. Chinese buyers are also said to be circulating, but for such a key Russian asset the Kremlin may not be too enthusiastic about that option. Deripaska now has some five months to act, which is a long time in politics and the metal markets.

Source: Financial Times

Constraints remain, though, on the aluminium market. Both the U.S. and Europe are in deficit, and supplies from Brazil being temporarily reduced is not helping sentiment. But most would see the relaxation of tension around consumption of Rusal material as a pressure release valve that has taken the steam out price rises for now.

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Previous talk of $2,800-$3,000/ton now seem unlikely in the short term. While aluminum remains in bull territory, much of the strength is probably baked into prices at current levels.

tanantornanutra/Adobe Stock

Higher is the simple answer. The world with the exception of China was in deficit before U.S. sanctions against Oleg Derispaska and his aluminum company Rusal.

So when the three million tons of primary metal Rusal exports outside of Russia are taken out of a market already worried by the recent partial closure of Norsk Hydro’s Alunorte alumina plant and Albras primary smelter, one should not be surprised by price increases and panic.

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Not only is the market deprived of new deliveries by the sanctions, but according to Bloomberg some 36% of global stockpiles on the LME and up to one million tons of metal held in inventories outside of China supporting financing deals is currently in limbo as buyers, traders, banks and brokers refuse to handle it for fear of falling foul of sanctions.

Part of the problem is that a large percentage of Rusal’s metal is traded and resides in stock financing deals, compared to top metal from other producers like Norsk Hydro and Alcoa. This is a legacy of the flood of metal that started to swamp the global market from the 1990s onwards after the collapse of the Soviet Union.

Technically there is no legal restriction on buying metal produced and sold by Rusal before the sanctions were applied, according to Bloomberg. Even so, the products have become less desirable in the U.S. and Europe as consumers are unsure of the status.

In addition, this week the LME has banned any further deliveries into its system, raising the question of what Rusal is going to do with with the three million tons of metal it is churning out every year. There will be buyers out there, especially in Southeast Asia, but they will demand a discount to handle the brand. With restrictions of sales of its alumina, Rusal could simply cut production rather than try to dump metal into less well regulated overseas markets.

Maybe more of a risk is the fate of Rusal’s alumina production as the firm supplies other smelters than just its own, potentially depriving alternative producers from supplying an already tightening market. Alumina prices have surged to over $600/ton as the LME primary metal settlement prices have risen to over $2,500 per ton.

So where to now? Have buyers missed the boat? It’s impossible to say. There could well be a short-term correction, but Bloomberg quotes CRU analysts as saying that prices could reach $2,800-3,000/ton, levels not seen since 2008.

Alunorte’s alumina production cuts, forced following allegations of river pollution, could be resolved later this month like the resulting cuts at downstream Albras. But that would only return the primary plant from 230,000 tons to its capacity of 460,000 tons, a drop in the ocean next to Rusal’s three million tons. Brace yourselves: aluminum remains firmly in bull territory.

The Renewables Monthly Metals Index (MMI) rose seven points on the month, hitting 107 for our April reading.

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Within the basket of metals, Korean, Chinese and U.S. steel plate posted price increases, while Japanese steel plate traced back slightly. U.S. steel plate jumped significantly, posting a 13.6% increase for the month.

U.S. grain-oriented electrical steel (GOES) coil fell on the month, while neodymium picked up by 0.7%.

The always volatile cobalt price shot up significantly last month, rising 10.6%.

Tesla Strategy Places Premium on Neodymium

As we mentioned earlier this week, growing demand for neodymium from electric vehicle (EV) maker Tesla will put even more pressure on what is already a constrained market.

In short, that means rising prices for the material, reflected in this month’s activity.

Tesla is looking to neodymium for magnetic motors in its Model 3 Long Range cars, as mentioned in the Reuters report we cited Tuesday. Last year, supply fell short of demand by 3,300 tons, according to that report.

DRC Looks to Shake Up 2002 Mining Charter

When it comes to anything cobalt, the Democratic Republic of Congo is typically at the center, being the source of the majority of the world’s cobalt.

Earlier this week, MetalMiner’s Stuart Burns wrote about President Joseph Kabila’s move to readjust the nation’s 2002 mining charter to, essentially, secure a bigger piece of the pie vis-a-vis the country’s vast mineral resources.

It comes as no surprise that the multinational miners doing business in the DRC aren’t exactly thrilled by the proposition of increased royalties and levies. However, as Burns noted, value of materials like cobalt and the demand they draw, combined with their relative scarcity, means such multinationals will continue to do business there, no matter what happens with the charter.

“If the state takes a little more of the pie, it will probably be reflected in prices,” Burns wrote. “But with limited alternatives for products like cobalt, it is unlikely to dent mining companies’ enthusiasm for investing in the DRC.”

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Actual Metal Prices and Trends

Within the basket of metals, Korean, Chinese and U.S. steel plate posted price increases, while Japanese steel plate traced back slightly. Korean plate rose 6.6% to $650.16/mt. Chinese plate ticked up only slightly, by 0.1%, to $716.64/mt.

U.S. steel plate jumped significantly, posting a 13.6% increase for the month, up to $920/st.

U.S. grain-oriented electrical steel (GOES) coil fell 1.9% to $2,597 on the month, while neodymium picked up by 0.7% to $71,265.50/mt.

The always volatile cobalt price shot up significantly last month, rising 10.6% to $98,274/mt.

gui yong nian/Adobe Stock

This morning in metals news, 2017 was a good year for Chilean miner Codelco, the city of Handan in China has called for a 25% reduction in steel mill production and the impact on Mexico of a terminated North American Free Trade Agreement (NAFTA).

State Miner Says Profit, Output Rose Last Year

Codelco announced that its profits rose in 2017, a year in which it produced its second-largest output ever, Reuters reported.

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According to the report, the miner posted pre-tax earnings of $2.885 billion, six times its earnings in 2016.

Chinese City Calls for Steel Production Cuts

The city of Handan is ordering 25% production cuts to ease pollution from April to mid-November, Reuters reported.

The city is located in China’s Hebei province, which produces nearly a quarter of China’s steel.

What Could a Post-NAFTA World Mean for Mexico?

NAFTA has now been subject to seven rounds of talks dating back to last year; in that time, the agreement has rocked back and forth between cautious optimism and concerns that the plug could be pulled at any time on the 24-year-old agreement.

The trading partners (the U.S., Mexico and Canada) failing to reach an agreement is certainly a possibility. The impact of such an outcome on Mexican trade would be significant, Bloomberg Businessweek explained.

In 2016, 73.3% of Mexico’s total exports went to the U.S., according to the report. According to the analysis, Mexican manufacturing, retail and and real estate companies could be hit hardest by a world without NAFTA.

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In addition, the report cites an Oxford Economics estimate projecting a 4 percentage point decrease in the country’s GDP by 2022.

The U.S. Department of Commerce. qingwa/Adobe Stock

This morning in metals news, the U.S. Department of Commerce announced its tariff exclusion process for steel and aluminum, world leaders announce the intention to work together on steel overcapacity, and bank accounts have been seized in connection to a corruption probe involving Rio Tinto’s Mongolia mine.

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DOC Publishes Tariff Exclusion Procedure in Federal Register

Entities looking to obtain exclusions from the newly passed steel and aluminum tariffs received some clarity on how to do so recently when the Department of Commerce posted the procedures for tariff exclusion.

“These procedures will allow the Administration to further hone these tariffs to ensure they protect our national security while also minimizing undue impact on downstream American industries,” Secretary of Commerce Wilbur Ross said in a DOC statement Sunday. “Starting tomorrow, domestic industry will be able to apply for exclusions through a fair and transparent process run through Commerce’s Bureau of Industry and Security.”

The DOC posted the procedures in a Federal Register notice.

According to the DOC, “Only individuals or organizations using steel or aluminum articles identified in Presidential Proclamations 9704 and 9705 and engaged in business activities in the United States may submit exclusion requests. Exclusion requests will be posted for a 30-day comment period on regulations.gov.”

Merkel, Xi to Work Together on Steel Overcapacity

German Chancellor Angela Merkel and Chinese President Xi Jinping plan to work together to tackle global steel overcapacity, the Financial Times reported.

The comments, on the heels of the newly announced U.S. steel and aluminum tariffs, came ahead of Group of 20 meetings scheduled for today and Tuesday, according to the report.

Bank Accounts Seized in Probe Involving Rio Tinto’s Mongolia Mine

Switzerland’s highest court upheld the seizure of $1.85 million in bank accounts as part of a corruption probe related to a Mongolia finance minister and a mine operated by Rio Tinto in the country, Reuters reported.

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According to the report, anti-graft authorities in Mongolia are looking into a 2009 agreement with the miner, which eventually led to the startup of the miner’s copper-gold project in the Gobi Desert.

This month, zinc prices started to trade lower, returning to the $3,200 level. This activity represents the first short-term price pullback we’ve seen in zinc prices since June 2017, when prices started their latest rally.

Source: MetalMiner analysis of FastMarkets

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But going back even further, the zinc price bullish rally started in 2016. Since then, zinc prices have increased around 120%, from $1,471/mt to current levels.

During this bullish rally, zinc prices reached a more than 10-year high, which signaled strength in the rally.

Source: MetalMiner analysis of FastMarkets

Some analysts believe this recent short-term downtrend serves as a possible peak for zinc prices. In other words, zinc prices may have already peaked and have started a new downtrend.

The alarms sounded on the London Metal Exchange when 78,950 tons of metal were delivered into LME stocks.

Before we speculate as to where zinc prices are going, let’s examine some of the indicators.

LME Stocks vs. Trading Volume

Traders commonly react to stocks changes, which is reflected directly in zinc prices. When a big delivery of any metal — in this case, zinc — reaches the LME stock, traders interpret this signal as a lack of tightness in the metal supply and demand equation.

In other words, traders think that the deficit is lower and sell their positions for the metal.

However, LME stock levels typically serve as a very short-term price driver (for days or weeks, not months). Rather, MetalMiner believes trading volumes better reflect the metal price trend. Zinc trading volume still supports the long-term uptrend, even if prices have so far trended lower this month.

Global Zinc Market

According to the International Lead and Zinc Study Group (ILZSG), 2017 left behind a deficit of 495 kt for refined zinc metal. Zinc mine output increased by 33.7% in India, while the increase in Peru was driven by higher output in the Antamina mine.

World output refined zinc production remained flat when compared to 2016, with increases in India around 30.4% versus a decrease in Canada, China, Peru and the Republic of Korea.

Despite the increases in zinc production, zinc demand increased by 2.6%, driven by zinc appetite in Australia, Brazil, China and Japan.

U.S. demand increased by just 0.6%, while European demand fell 0.5%.

Chinese Zinc Market

As for other industrial metals, Chinese numbers are commonly used as an indicator for the global metal industry. During the November 2017 to January 2018 period, China’s official zinc trade figures show 291,000 tons of refined zinc entering the country. This figure is the largest since 2009, when metallic trade flows were massive.

Shanghai Futures Exchange (ShFE) zinc stocks have recovered from a 2017 drop of 84,000 tons. Since the beginning of 2018, zinc stocks have rebounded by 46,000 tons, reaching the highest level since May 2017 (114,887 tons).

Brazilian Zinc

Brazilian mine Nexa Resources forecasts a deficit for zinc in 2018, with demand outpacing supply.

The deficit may continue due to the inability of Chinese small mines to renew permits under current environmental policies. Therefore, Chinese production may not be able to meet the annual demand growth of around 2-2.5% (based on previous growth).

What This Means for Industrial Buyers

MetalMiner sees the current pullback in zinc prices as short-term in nature as opposed to a price trend correction.

Therefore, while base metals and zinc remain in a current bull market, buying organizations may want to take advantage of lower prices and learn the exact time to commit to some zinc volume.

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