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.

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  • Holidays in India mean an uptick in gold buying — our Sohrab Darabshaw covered India’s holiday gold surge.
  • The fourth round of renegotiation talks focused on the North American Free Trade Agreement (NAFTA) concluded earlier this week. We covered the latest round of talks, which by all accounts have the three negotiating teams at an impasse.
  • As the fallout continues from Kobe Steel’s quality data falsification scandal, our Stuart Burns wrote about what exactly might have gone wrong at Japan’s third-largest steelmaker.
  • The World Steel Association’s Short Range Outlook came out this week, predicting solid, albeit moderated growth for the global steel market.
  • Precious and base metals have been behaving similarly, our Irene Martinez Canorea wrote this week.
  • The U.S. International Trade Commission launched a new Section 337 probe related to automation systems.
  • The value of the U.S. dollar has a significant impact on the fortunes of a number of metals, our Stuart Burns explained.
  • And how about palladium? Burns also touched on the rise of the platinum group metal and its leapfrogging of platinum (for the time being).
  • It’s third-quarter earnings report time. Alcoa and Nucor were among the latest companies to announce their earnings for the latest quarter.

Free Download: The October 2017 MMI Report

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The World Steel Association released its October 2017 Short Range Outlook (SRO) — its assessment of the global steel market — on Monday.

For the most part, the latest SRO relates good news for the global market.

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“In 2018, we expect global growth to moderate, mainly due to slower growth in China, while in the rest of the world, steel demand will continue to maintain its current momentum,” said T.V. Narendran, chairman of the World Steel Association’s Economics Committee, in the report.

According to the SRO, global steel demand will reach 1,622.1 million tons (Mt) in 2017 and 1,648.1 Mt in 2018. Excluding China, demand is expected to grow 2.6% this year and 3.0% next year.

Dr. Nae Hee Han, the World Steel Association’s director of economic studies and statistics, wrote on Monday that while the numbers in the SRO are mostly positive, there are a few caveats.

First, she wrote, the growth of emerging economies did not meet previous SRO estimates set in April.

“A number of emerging economies did not perform as well as expected in 2017 due to short term disruptions caused by ongoing reform initiatives or political factors,” Nee Han wrote.

On the other hand, developed economies — the European Union, Japan and the United States — performed better than expected. But Nee Han explains that emerging economies will experience greater growth in 2018, partially as a result of reform initiatives, including the Goods and Services Tax (GST) system in India, energy and tax reform in Mexico, exchange rate reforms in Argentina and Egypt, and fiscal reforms in GCC countries.

As for the sustainability of the current growth trend, Nee Han writes that it might not be a long-term thing.

“Secondly, the worldsteel Economics Committee at its most recent meeting in Amsterdam a month ago was in agreement that the current momentum is driven mostly by cyclical rather than structural factors,” she wrote. “We do not find the improved growth figures to be sustainable in the long term: China’s continued deceleration, megatrends such as aging populations, a shift to a circular economy and increasingly stringent environmental regulations continue to weigh against steel demand.”

Another optimism-mitigating factor listed by Nee Han is the statistical anomaly that is China’s 2017.

“In 2017 China closed most of its illegal induction furnace capacity, which up until now had not been included in official statistics,” Nee Han explains. “With this closure, the demand satisfied from these producers is now being met by the official sector. This shift of demand explains the forecasted jump in the Chinese growth rate in 2017 – the technical effect of the underestimated 2016 base.”

Around the World

Demand for finished steel is variable around the world, but, for the most part, is forecasted to increase this year and next in most regions.

In the North American Free Trade Agreement (NAFTA) bloc, there is an expected 4.9% year-over-year increase in demand (or 138.7 Mt) and 1.2% increase in 2018 (140.4 Mt).

Meanwhile, the report forecasts a 2.5% jump this year in the EU (162.1 Mt) and 1.4% increase next year (164.3 Mt).

In the Commonwealth of Independent States (CIS) bloc, which includes Russia, there is an expected 3.6% increase in 2017 (51.1 Mt) and 3.8% next year (53.0 Mt).

In the Asia and Oceania region, there is an expected 9.3% growth in 2017 (1,098.8 Mt) and 1.1% in 2018 (1,111.1 Mt).

In Africa, there is an expected 1.6% drop in demand this year (37.0 Mt) and a 3.3% jump next year (38.2 Mt).

In Central and South America, the report forecasts a 2.5% jump this year (40.4 Mt) and 4.7% jump next year (42.3 Mt).

Construction and Automotive Sectors

What about industry sectors, like construction and automotive?

According to the SRO, construction growth in developed countries, which has been relatively slow since the 2008 economic recession, is “now showing more positive signs both in the residential and commercial sectors due to rising incomes and improving investment sentiments.”

Free Download: The October 2017 MMI Report

As for the automotive sector, the report states that despite a strong 2017 overall, growth could moderate in the U.S. and China, a trend that is “likely to extend to other countries in 2018.”

There are reasons why miners — indeed, all producers across industries — seek to dominate market share.

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The biggest reason? Being able to influence the market.

Yes, economies of scale come with size and in the case of mines to metal integrated trader Glencore that dominance in the zinc market gives them influence over not just mine output but concentrates, tolling and refining in a way that is not rivaled by any other firm.

Nor is the firm too kind to do things by halves — when they decide on an acquisition, on a market move, on a position, they do it decisively and with conviction.

In October 2015, Glencore sent shock waves through the market by cutting a third of its output, some half a million tons, to address what was widely seen as an oversupplied market and to stabilize prices. It worked — in just two years, the price has risen from $2,000/ton at the start of 2015 to $3,300/ton today.

LME zinc price, from October 2015 to October 2017. Source: LME

A Financial Times article states Glencore’s Australian Mount Isa and McArthur River operations took the brunt of the 2015 supply cuts, with output reduced by 380,000 tons. In total, the Glencore shutdowns removed 3.5% of global mine production, as the miner curtailed output from mines in Australia, Peru and Kazakhstan. In the meantime, end-of-life closures at Century in Australia and Lisheen in Ireland helped tighten the market.

Arguably Glenore’s action, while painful for zinc consumers, have in the long run done the zinc market a favor.

The rise in prices has supported the case for investment in new mines, such as Gamsberg and Duglad, due to come online towards the end of the decade. But even miners recognize you can have too much of a good thing, and limiting further price rises would not only help consumers but would help mitigate the demand destruction that comes from prices rising too fast and too far.

With that in mind, will Glencore look to bring back some, or all, of its idled capacity in 2018?

The firm continues to bet big on zinc, announcing last week its plans to increase its stake in Peru’s Volcan Cia Minera SAA, Bloomberg reports. With new mines due to come on stream in 2019 and 2020, supply constraints to the zinc market will eventually ease somewhat. Doubts remain, however, whether they will be enough to see the market in surplus.

Deshnee Naidoo, chief executive officer of Vedanta’s zinc unit, said a more sustainable zinc price would be $2,500-2,800 per metric ton. Others may argue with her, but Glencore has shown it can move markets and has the means — like Saudi Arabia did in the 1990s and 2000s with oil — be the swing producer, stabilizing a market for the benefit of both producers and consumers.

Traders often get a bad press for short-termism and the blind pursuit of profit, but Glencore has shown it acts in the longer term, too, and is capable of taking a strategic view of the market, of taking short-term losses in the pursuit of longer-term gains. The firm is uniquely positioned in the zinc market to act as a benign stabilizing element, keeping prices at a profitable but not demand-destructive level.

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It is clearly not as simple to regulate mine supply as it was oil supply for Saudi Arabia. You cannot turn off a mine like you can the spigot of a pump.

But with so many diverse zinc resources, Glencore is in a better position that any to smooth out the dips and peaks, for the sake of its shareholders and for the market as a whole.

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On the heels of an eight-point leap last month, the Construction MMI dropped a point to hit 90 for our October reading.

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The prices of Chinese rebar and H-beam steel, in addition to U.S. shredded scrap, all fell on the month. European aluminum 1050 sheet also posted a modest drop.

On the positive side of the ledger, Chinese aluminum bars and the trio of U.S. bar fuel surcharges in this sub-index posted price increases.

Slumping Housing Market

As we noted last month, the housing market struggled in August, when existing-home sales fell to their lowest levels of the year.

Hurricanes Harvey and Irma, which shook Texas (and southwestern Louisiana) and Florida, in addition to the severe humanitarian toll, also rocked the housing market.

“The South saw a decline in closings last month that was largely attributed to the after-effects from Hurricane Harvey in the Houston area,” according to the National Association of Realtors (NAR). “Home sales likely will be impacted for the rest of the year in Houston and in the most severely affected areas in Florida after Hurricane Irma.”

“Nearly all of the lost activity will likely show up in 2018,” said Lawrence Yun, the NAR’s chief economist.

Even so, home prices are rising fastest in cities prone to experiencing natural disasters, according to the NAR.

In fact, they’re rising twice as fast in those places compared with lower-risk areas, NAR reported, quoting a study by real estate data firm ATTOM Data Solutions.

“Strong demand for homes in high-risk natural hazard areas has helped to accelerate price appreciation in those areas over the past decade, despite the potential for devastating damage, as evidenced by the recent hurricanes that made landfall in Texas and Florida,” said Daren Blomquist, senior vice president at ATTOM Data Solutions, as quoted by NAR. “That strong demand is driven largely by economic fundamentals—primarily the presence of good-paying jobs, although the natural beauty that often comes hand-in-hand with high natural hazard risk in these areas is also attractive to many home buyers.”

Reuters last month reported on Harvey’s impact on the Houston housing market, namely in the form of a housing shortage and rising prices reminiscent of Hurricane Katrina’s impact on New Orleans.

“The supply of houses and apartments is expected to drop sharply with tens of thousands of homes destroyed and uncertain prospects for future flood insurance costs,” Reuters reported.

Growth in Construction Spending

According to the most recently available U.S. Census Bureau data for the month of August, construction spending in the U.S. increased 0.5% over the revised July estimate of $1,212.3 billion.

The August total of $1,218.3 billion is up 2.5% from the August 2016 total of $1,189.1 billion.

Broken down by sector, private spending was up 0.4% in August from the previous month, at a seasonally adjusted total of $954.8 billion.

Public spending amounted to $263.5 billion, up 0.7% from the previous month. Educational construction spending was up 3.5% from the previous month, while highway construction dropped 1.3%.

Architecture Billings Continue Growth

According to the Architecture Billings Index (ABI) put out by the American Institute of Architects, billings continued to show growth in August.

Billings across the country increased for the seventh consecutive month, according to the most recent ABI report.

With a reading of 50 indicating no growth, the South region posted the strongest month with a reading of 55.7, followed by the Northeast (54.3), Midwest (52.5) and West (51.3) regions. The overall billings reading rose from 51.9 last month to 53.7 for August.

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A Reuters report last week suggests relief is in sight for Western manufacturers of aluminum semi-finished products under pressure from growing Chinese exports.

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Headlining how China’s semi-finished aluminum exports fell for a third straight month in August, the article cites punitive duties imposed by the United States and India on Chinese aluminum foil as a reason for the decline. Semi-finished exports stood at 360,000 metric tons last month, Reuters reported, quoting revised customs data. That figure is down 3.2% on the same month a year ago and down 7.7% from 390,000 tons in July.

Although the monthly export figure is the lowest since February 2017, the first eight months of this year still showed a 5.2% increase versus the same period in 2016. Further data seemed to conflict with the argument that the foil duties were the cause of the decline in recent months. January to August foil exports were up 10.1% at just under 800,000 tons. Although they have dropped in recent months – down 4.9% year-over-year and down 6% from July, those drops only account for 5-6,000 tons per month of lost semis exports. The vast majority, 30,000 tons per month of reduced exports, are coming from extrusions.

Quoting Paul Adkins of AZ China, the report identified a substantial 29% slump in exports of extruded aluminum bars, rods and profiles as the main cause for the overall falls in semis exports despite an increase in flat rolled numbers. The main culprit appears to be U.S. tariff action against extrusions and helps explain why Chinese extrusion mills have been so aggressive in Europe in recent weeks, dropping conversion premiums for extrusions (possibly in an attempt to make up for lost sales to the U.S.).

With Chinese extrusion mills on less than 30-day delivery schedules they are clearly not overly busy. This suggests that although domestic demand has been steady, it has not been as strong an influence on primary metal prices as investor appetite for bidding up the futures markets would suggest. That has more to do with environmentally motivated capacity curtailments creating a narrative of shortages — resulting in speculators building strong net long positions and substantial primary metal prices rises — than it does any genuine tightness in supply.

An Aluminium Insider article discussing the findings of a report called the China Beige Book by a private, China-based analyst raises questions about the sustainability of recent rapid price rises and if they are based purely on the premise of reduced supply.

The study states that, despite numbers released by Beijing, overall capacity in the aluminum market has experienced a net rise over the last six consecutive quarters. At the same time, the economy is experiencing a slow-down. “Sector-wide growth took a dive across the board—revenue, profits, output, export orders, volumes, hiring, capex, borrowing, wages, and sales prices,” explained the report, suggesting perceptions of tight supply are misplaced and speculator-driven.

Free Download: The September 2017 MMI Report

If that is the case, European extruders may not be alone in facing increased competition this winter from China’s semi-finished product mills, as they seek to secure markets for a wide range of semi-finished products propelled by a cooling domestic market.

Steel prices in China have been rising, but iron ore prices have been falling — what’s going on there?

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China is shutting domestic iron ore mines at an accelerating rate, forcing steel companies to import iron ore from overseas, which would normally be supportive for the iron ore price.

The answer it would seem, as is so often the case, has more to do with speculators’ view of future fundamentals than actual current fundamentals.

Strong Chinese Demand for Steel

Steel prices in China are strong because steel demand remains robust, despite exports being crimped by protectionist measures in North America, Europe, India and elsewhere. Domestic demand is holding up well.

Meanwhile, supply-side action by Beijing is cutting swathes of steelmaking capacity. Initially, much of the cuts came to “illegal” production, such as EDF scrap based long products mills — which has happened largely under the radar — but also older, less efficient and more polluting steel plants. All of this follows Beijing’s pledge to cut 50 million tons this year as part of an environmental drive to reduce air pollution by November (the start of the winter heating season).

Source Financial Times

After strong price rises this year, investors have done well and are now taking their profits ahead of a perceived fall in demand, as steel curtailments really begin to bite later in the year. It would be a brave speculator who bet against the wave of negative sentiment toward the iron ore price, including even the Australian government, which has been warning of price falls.

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It would be an exaggeration to say steel producers have never had it so good, but on the whole, conditions have been supportive of the sector this year — both globally and in top producer China.

What’s Up, Beijing?

Beijing’s supply side reforms, cutting out older, less efficient steel plants largely on environmental grounds has directly supported the larger state steel sector. Much of the “illegal” and less well-regulated (therefore more polluting) producers are concentrated in the smaller end of the private sector. These have been the first to suffer enforced closure as Beijing pushes through its aim of closing some 50 million tons of capacity this year.

A widespread clampdown on the scrap-based EAF producers (virtually all of whom are in the private sector, and deemed illegal because they often do not have licenses and more polluting because they are based on scrap)  has constrained supply and given rebar prices a drug-induced high.

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The move underpins Beijing’s rationale to achieve as many wins as possible, reduce capacity to avoid anti-dumping moves by trading partners, improve environmental conditions (specifically particulate emissions, which cause smog), and consolidate a highly fragmented domestic steel industry all while simultaneously minimizing job losses and supporting the state sector at the expense of the private sector.

Bingo — they have it all!

Tale of the Tape

So far, you should say, Beijing is doing very well. Capacity has closed, particularly older and therefore likely less efficient capacity; steel production is actually up 4% year-on-year, and prices have risen robustly.

The state sector is doing very well, enjoying high prices, strong demand with the removal of their smaller competitors and, following an 18% fall in iron ore prices over the last month, look set to make even better profits in the last quarter. Iron ore import volumes have also fallen of late, as the graph below from the FT shows, but that may partly be due to large inventories that had built up as the price rose.

Source: Financial Times

Steel prices in China as tracked by MetalMiner’s IndX have weakened this month, but with the fall in raw material costs Chinese producers’ margins have held up well.

Free Download: MetalMiner’s September 2017 MMI Report

In the rest of the world, China’s reduced exports, down 26% year-to-date due to anti-dumping barriers and improved domestic demand, have created some respite for foreign steel mills, particularly Russian, Turkish, Ukrainian and Canadian suppliers that have stepped in to take China’s place as low-cost supplier to the U.S. and European markets.

Producers in Europe are still complaining bitterly about competition, but as with the U.S., realistically it is less about China and more about low-price suppliers in Russia, Ukraine and elsewhere.

Outlook

On the back of rising global steel demand and soft input costs, steel producers’ margins should be supported even in Western markets and prices remain firm next year — even if China’s demand grows only slowly.

The abrupt rise in the aluminum price this month has caught many by surprise.

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Aluminum had been trading sideways for much of this year. Although the market was rife with rumors that China intended to close smelter capacity that was not carrying the required permits and approvals, most treated the prospect that such curtailments would be pursued with any rigor with some skepticism.

Past attempts to curtail excess production capacity among China’s manufacturing industry have been poorly pursued and often frustrated by local State governments keen on maintaining employment and tax revenues.

This time does genuinely seem to be different.

That realization finally set in when China Hongqiao, the world’s largest aluminum maker, confirmed it would cut annual capacity of 2.68 million metric tons, about 30% of its total, this month.

Following restrictions last month that the Shanghai Futures Exchange (SHFE) put on the trading of iron or steel futures by raising margins, speculators were looking for new investment opportunities just as concerns about aluminum supply became widespread. The rapid rise in the aluminum price, leading the Shanghai Futures Exchange to a six-year high, is now recent history.

According to the Financial Times, JP Morgan is forecasting that prices have another $100 per ton to rise in the fourth quarter, despite aluminum inventories in China more than quadrupling so far this year.

Although Beijing is following its policy of closing un-permitted production with considerable vigor, the resulting high prices are encouraging every smelter that has approvals to operate at 100% capacity. As a result, production has never been so high, with much of the surplus metal going into store.

Trade unions at producers outside of China who have been suffering by the flood of semi-finished Chinese aluminum exports called earlier this year for a global forum to address the issue. But before such a forum can be gathered, it seems likely that China’s high SHFE aluminum price may curtail exports as domestic mills struggle to compete internationally based on high-priced domestic primary aluminum.

Citigroup estimates China’s unlicensed aluminum production capacity to be in the region of 4 million tons a year — more than 10% of China’s total 2016 output.

The price rises have undoubtedly been exacerbated by speculator activity, as hot money has flowed into aluminum and zinc. The aluminium price is up 27% in Shanghai and 23% on the LME, with the zinc price rise not far off at 24% in Shanghai, driven by the same fundamental concerns over shrinking supply. Some skepticism remains about how vigorously Beijing will pursue its policy of closing “polluting industries” in the northern provinces during the winter heating period. But following the miscalculation of how robustly environmental enforcement would be pursued this summer, the market is rapidly reassessing the prospects of significant closures during the November-March period.

In reality, China is not short of primary aluminum, stocks are considerable and although demand is rising, supply is adequate. The narrative of supply shortages is a strong one that speculators seem intent to run with for as long as they can.

Under the circumstances, Citi may well be right that the current firm trend has some way to run and we can expect higher prices in Q4 and H1 of next year.

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Bizarrely, although zinc prices have soared this year on the back of demand for galvanized steel for construction, further strength this week may have been heightened by a loss of investor appetite for those same steel products.

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Following booming steel prices this year, the Shanghai exchange increased trading charges last week in an effort to curb speculative activity. Steel prices have consequently slumped by 3.5% as investors got out of steel and into steelmaking raw materials with lower transaction charges, such as zinc.

Surging Shanghai zinc prices have in turn encouraged a rise in the London Metal Exchange price, hitting a peak of $2,994 per metric ton — not seen since October 2007, Reuters reports.

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