We have written a lot over the last few weeks about the macro-economic situation the world’s metal markets find themselves in so it came as pleasure to connect with an old friend of ours Dan Kendall, President of ABC Metals to hear about life at the sharp end. ABC is a distributor of high quality precision slit non ferrous metal products with distribution centers in the mid-west and Texas.
Distributor inventory levels are at all time lows. Dan had a wonderful quote from the CEO of another distributor who said, “You could shoot a gun in our warehouse and not hit any metal”. Faced with falling demand and rising prices, distributors have stopped buying. Inventory levels are dramatically lower and only niche players with long running contracts and sophisticated cost hedges in place are managing to still grow their businesses. ABC was up 27% last year. Read more
Which would you prefer, a diamond or a sapphire? (sapphire) Which would you give your wife, gold or silver (silver)? Despite the fact that gold reached that $1000/ounce threshold last week, the yellow metal is still far away from its all time inflation adjusted high back in 1980, ($850/ounce in 1980 dollars) according to this article, that would be the equivalent of $2177/ounce in today’s dollars, though it only hit that peak for one day back in 1980. We have been asked several times to comment on where we feel the gold and silver markets are headed. In short, we do believe that gold is likely to rise still further as investors (and speculators) tend to put their money in gold when the dollar falls (and oil is high). Given the overall economic picture, we believe many speculators are moving their dollars to commodities in general and hence prices are still increasing. We’ll get to silver in a minute. Read more
We have spoken several times over the last few months about the shipping industry. It may not be a traded metal product but it has a direct bearing on metals prices. And, more important is often a bellwether for the state of regional economies. So after a bumper 2007, it is interesting to see how demand is dropping in 2008 just as an additional 60% of global capacity is about to be added.
This would not be a problem if demand continued at the rate we have seen for the last few years. But that is not the case. Supply and demand patterns are in a state of rapid flux at the moment as evidenced by the capacity utilization rates dropping on the Asia to US west coast routes for five straight months and on the Europe to US east coast route, both a function of the weaker dollar and falling demand. Conversely, (and this will be good for US importers and consumers) capacity utilization is up from the US to Asia and Europe as exports increase. This will encourage shipping lines to drop the import rates to position containers for the more lucrative export routes. Rates from Asia to Europe are also up due to the strong Euro transferring material and component supply to Asia. A further sign of strain in the market are the steps being taken toward consolidation of services. We take this as a sure sign that shipping lines are trying to protect rates in the face of falling demand. Even the industry leader Maersk Line is in talks about vessel sharing on their transpacific routes.
The question is to what extent will this continue and can we expect this massive increase in capacity to benefit US consumers by lowering freight costs further? The answer depends at least in part how much a US downturn will spill over to the rest of the world. To what extent, over the last few years, are the different economies interdependent and to what extent have they decoupled (the current in vogue phrase)? Evidence presented in the Economist suggests that the emerging economies may indeed have decoupled from the mature western economies to a greater extent than we had realised. Half of China’s exports now go to other emerging economies. Sales to the other BRIC countries are up 60% year on year to January. Domestic demand is also surging (a matter of concern to the Chinese government worried about inflation) with consumer spending rising three times as fast as in developed countries and fuelled by massive capital spending, up 17% in emerging economies last year. Much of this investment is in infrastructure and property which will continue to fuel internal consumption keeping the economies growing even as the US does not.
Much of this additional shipping capacity was ordered on the assumption that the global economy would continue to expand. With the US going into a period of stagnation, there is bound to be excess capacity available if not to the extent that a global recession would release. So the good news for hard pressed US manufacturers is that rates are likely to ease over the coming year, though not collapse, reducing import costs (the exchange rate notwithstanding) and making exports yet more competitive. Wouldn’t it be something if the US economy which was facing a massive imbalance of payments position just 18 months ago was to export itself out of a recession in 2008?
While metals such as gold and copper have recently hit record highs, the future outlook is uncertain — particularly since oil and the global economy are adding to the volatility of the metals market.
Always considered the safe haven of metals, gold reached a record $992.95 an ounce earlier this week. Soon, it could even hit $1,000 an ounce. Who is to say, however, if it’s a decent time to jump into a deepening pool of gold wealth? This is a terrific time to sell old gold jewelry and make some bang for your bling, as Lisa reported in a past entry, but the investment arena isn’t as certain. With prices that jumped 52 percent since the end of 2006, the oft-promising metal could be a high risk at this point. Then again, the dollar could be pushing gold even higher in value next week, when the U.S. jobs report, which is expected to be weak, is released against the backdrop of the U.S. dollar dropping further in value against the Euro.
If you caught the first part of our series on green innovations in the metals industry, you’ll know that the MetalMiner staff is excited about following the growth and development of green metals. We love hearing about eco-friendly improvements and new practices in the metals industry. The men and women behind GreenAlloys share this excitement for going green, and they decided to take a step to make metals recycling and low-lead products more prominent in our society. Earlier this week, I had the opportunity to talk to Al Barbour, president and CEO of Concast Metals Products Co., the company responsible for GreenAlloys. If you want to be a progressive company or manufacturer today, you need to look at what the end customer wants, he says of his eco-friendly metals company, touted as the next generation of environmentally-friendly alloys and materials. The view of society is moving in this direction, this green direction. This is a trend that will remain long-term. Read more
The mining sector saw $70 billion in transactions during 2006 alone, and a recent study from Ernst & Young suggests that this number will rise in 2007 and 2008, particularly if BHP Billiton moves forward in their bid to overtake Rio Tinto — a topic that was discussed on MetalMiner earlier this week. Consolidation shows no signs of slowing, and high metals and mineral prices are fuel for further acquisitions. In addition, the report reveals another finding that metals experts and analysts might consider interesting: The accuracy of outcomes for the recent metal price forecasts has been consistently disappointing, reports the paper, EYeSight on Consolidation: Backpedalling on the Cycle. This is a crucial piece of the report, as metal price forecasts, accurate or not, can be responsible for consolidations, acquisitions, and the choices investors make.
The Organization for Economic Co-operation and Development (OECD) in Paris has just released their Composite Leading Indicators (CLI) for the major economies. Despite the dry economic analysis, one can read some very interesting predictions. I should start here by defining CLI as a qualitative rather than quantitative measure of the trends in an economy. A CLI above the long term average of 100 suggests an economy on a growth trend. Below 100 suggests an economy on a slowdown. It can be more subtle than that but for our purposes we are looking at the medium term trend rather then month to month implications. Read more
The papers are all worrying about the power shortages being experienced in South Africa and reporting with various levels of alarm the likely impact on the price of precious metals, base metals, Ferro alloys and the stock of companies producing these materials. The reality is the recent outages in South Africa were a disaster waiting to happen. Excessive rain has made the coal reserves unusable at the plants of some of South African state power producer Eskom and power plants have been idled or on reduced production while the country struggles to share what is available.
Mines and metal smelting works have been closed this week and a limited number look set to resume working as agreements are reached with Eskom on what power it can reliably provide. The reality is this is a problem many years in the making as South Africa has failed to tell the whole story over major new power plant investment and infrastructure upgrades. It is no surprise therefore that Eskom says it will be 2012 before full service can be reliably resumed. Read more
Several weeks ago, we published an article titled Industrial Economic Signals: Down But Not Out. At that time (January 4, to be exact) everyone was speaking the “R” word but the indicators weren’t saying it was so. We’ll know in a couple of days what the indicators are telling us for the month of January but if you pick up any local paper (I picked up Crain’s Chicago), you can’t go to far without reading headlines such as, “Winded City market mahem, recession darken local business mood”. The story goes on to describe a local castings company whose revenue has dropped by 15% while customers were demanding 15% cost reductions ‘or they would move their business to China or Mexico’ according to the article. (Have at it, we would say as the owner of that business….you aren’t going to get 15% savings out of China these days but we’ll leave that rant to another post.)
Back to the headline at hand. Wall Street, according to a recent Purchasing article, basically feels that prices of steel will increase sharply in Q1 “due to increased buying by service centers, benign imports, and increased export opportunities.” The article quotes Michael Willemse, the industrial products research analyst at CIBC World Markets, as saying, “these factors will offset weak end-market demand in North America” and allow the mills to get $660-$680 prices for March deliveries. The article goes on to say that many of the steel analysts in the last month believe the price of steel is set to rise.
But what goes up must come down. And in this case, we could see supply side cost increases pushing up prices in the first half of the year but weak demand would mean they wouldn’t stick. And we said that back in December when we first launched this blog.Read more
I received a phone call last evening from a friend in Shanghai. He had asked me if I heard about the power shortages and energy crisis in China. Oddly enough, I had been planning on writing a short piece on how power shortages were having an impact on various metals markets. In China, the country’s largest aluminum producer shut down operations at two plants in Guizhou and Zunyi, according to this recent article in Forbes. With annual production of “320,000 and 110,000 tons respectively”, the loss of this production is bound to have ripple effects in the Chinese and possibly wider markets. No date has been set for when the plants will begin production again. The effect on aluminum prices coming out of China remains to be seen. I have read that the prices of alumina, will drop due to lack of demand but the cost of primary aluminum or semi’s may increase. Read more