Articles in Category: Supply & Demand

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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.

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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.

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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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This morning in metals news, the Brewers Association issued a statement expressing qualms about the Trump administration’s steel and aluminum tariffs, one analyst says U.S. Steel might actually be worse off after the tariffs, and copper miners are looking to the Mongolian dunes.

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Brewers Association Says Canada, Mexico Tariff Exemptions Represent ‘Step in the Right Direction’

The Brewers Association released a statement in which it expressed concerns about the Trump administration’s steel and aluminum tariffs.

“The Brewers Association is concerned about both the aluminum and steel tariffs and the potential implications they will have on small and independent brewers,” the association said in the statement. “Though we think the more targeted tariffs exempting Canada and Mexico are a step in the right direction, we do not believe that can sheet aluminum or the steel used to make brewing equipment poses a threat to national security.”

Tariff’s Impact on U.S. Steel?

According to one analyst, the recently announced 25% steel tariff might not be a good thing for U.S. Steel.

Gordon Johnson, an analyst with the Vertical Research Group, told CNBC that U.S. Steel was “significantly, fundamentally, worse off “after the tariffs, which were intended to help the domestic steel industry.

Mining in Mongolia

Miners are always looking for the next source of valuable materials — according to Reuters, the dunes of Mongolian might be the next big source of copper.

Despite risks associated with work in the country, including extreme weather, miners are turning to Mongolia in search of copper, which is increasingly in demand (particularly in electric vehicles).

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According to the report, Rio Tinto has been the sole copper miner in Mongolia for a while, but that could change as copper demand is on the rise vis-a-vis electric vehicles and copper sources in Chile are drying up.

Cobalt may be a minor constituent of lithium ion batteries, but it is a crucial one.

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Lithium has been the metal in the news this year. Bolstered by rising demand for hybrid and electric cars, however, the supply market has been struggling to keep up with demand.

Not that the world is short of lithium, as we wrote recently — it is widely distributed and relatively abundant. But projects time to ramp up, and while many are on the planning board, not all reach production maturity.

Cobalt, on the other hand, is a much more constrained market — not just constrained, but the vast majority is from politically unstable sources.

According to Reuters, two-thirds of global cobalt comes from just one politically very unstable country – the inappropriately named Democratic Republic of Congo, with some 80,790 tons of the metal sourced from there last year out of a total market of about 119,710 tons.

Worse, the DRC is sliding back into yet another potentially bloody civil war.

Joseph Kabila was elected for a final five-year term in 2011 on a mandate that ran out in 2016, but he clings on even though no more than 10% of Congolese support him, according to the Economist. Ten of 26 provinces are suffering armed conflict, the Economist reports, with dozens of militias once again on the warpath.

Some 2 million Congolese fled their homes last year, bringing the total still displaced to around 4.3 million out of a total population of nearly 80 million. The state is tottering and the president is illegitimate, the Economist says. Ethnic militias are proliferating and one of the world’s richest supplies of minerals is available to loot.

Source: London Metal Exchange

So the rise in the price of cobalt — while it mirrors that of lithium and has so far been driven largely by battery and super alloy demand — is fragile to political unrest in a way that lithium is not.

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Of the two, cobalt represents a bigger supply risk and may yet prove the cause of considerable volatility if the DRC’s neighbors cannot get their act together and seek a solution in the most resource-blessed but politically cursed of African nations.

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In an effort to curb horrendous atmospheric pollution, particularly during the winter heating season, Beijing’s crackdown on energy-intensive and polluting industries resulted in widespread closures across the Chinese aluminum smelting industry.

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But even as expectations rise that those smelters from Shandong to Shanxi may soon restart, Reuters reports record stockpiles on the SHFE and prices that are down some 10% since last December will weigh heavily on smelters’ decision-making.

Many are already barely profitable and, contrary to expectations six months ago, national Chinese aluminum production has continued running at a high level. December’s output rose to the same level as June when countrywide smelters had been running at capacity to stockpile before the expected clampdown.

The irony is that while Beijing has clamped down on production in some regions closer to major urban areas, producers — many of them state-owned — have been free to build new, lower-cost capacity out in the provinces. Reuters quotes Paul Adkins, managing director of the consultancy AZ China, who estimates that 4.4 million metric tons of new capacity would be completed this year, mostly from state-run companies.

Despite new capacity being based on lower-cost coal and/or alumina supplies, there are question marks whether all this 4.4 million tons will make it to full capacity.

Adkins believes the actual increase may only be some 3 million tons. Even so, incremental increases will be at a cost base lower than older plants and will allow them to operate a break-even price below established plants. If prices remain weak, and the overcapacity issue suggests there is little prospect of a significant rise, then there will be a further shift of production to the state sector, as these new, largely state-owned plants thrive while older, more costly plants struggle.

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Primary metal is restrained from directly impacting the global market by 15% export taxes, but limitations on extrusions, rolled products and forgings are less constrained (in some cases supported with rebates). A lower-priced, amply supplied domestic primary market will enable semi producers to export excess capacity abroad, adding to an already fractious trade situation following the U.S. announcement of its intention to levy a 10% import tariff on semi-finished aluminum products.