Articles in Category: Supply & Demand

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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.

A while back I was called by a journalist at a prominent paper and asked what I thought about the lithium market. Was it another rare earth metals story – limited supply and rapidly escalating demand? Or, worse, was the world simply going to run out of lithium in the face of surging battery demand and, either way, where did I see prices going?

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My position was the world is not short of lithium. It is abundant as an element — it is, or was at the time, just short of scaled-up extraction projects. So no, I did not see the world running out of lithium but that a healthy run-up in prices would encourage more investment and, hence, increased supply – maybe a less dramatic version of the financing that became available for Mountain Pass after the run-up in REM prices.

Interestingly, the journalist did not print any of my comments — fair enough, as they did not support his position that the world is running out of lithium.

Since then, the prices have indeed doubled. The Financial Times reports the price for lithium carbonate from South America has hit $14,500 a ton over the past two years, quoting Benchmark Minerals Intelligence.

Source: Benchmark Minerals Intelligence via the Financial Times

Much of the excitement is due to the rise in electric vehicles (EVs) and hybrids, and although there is no futures market in Lithium – prices are set in long term contracts – buyers have to contend with a bullish supply market as battery makers scramble to cover forward under long term agreements, as the rise in prices affirms.

Indeed, not only product prices but the share prices of producers is set in large part by predictions on the uptake of electric and hybrid cars.

Back to the main thrust of the Financial Times article, Sociedad Química y Minera de Chile (SQM) is up for sale following regulators enforcement of a sale by parent PotashCorp as a prerequisite of aquiring its Canadian rival Agrium. SQM accounts for more than 20% of the world’s lithium supply, making it one of five companies that dominate the global market alongside China’s Ganfeng, Tianqi Lithium, FMC and Albemarle, while its lithium division accounts for 60% of SQM’s profits – arguably a high price regulators are demanding PotashCorp pay to acquire Agrium. But that depends very much on what price the market puts on SQM, which in turn depends on how bullish bidders feel about the prospects for electric and hybrid transport.

PotashCorp could conceivably be getting out at the peak.

According to the Financial Times, quoting consultancy Wood Mackenzie, if electric vehicles reach 5% of car and light truck sales globally by 2025 from their current level of 2%, then lithium prices will fall to $6,900 a metric ton by 2025. However, if that share, including plug-in hybrids, climbs to 12% by 2025, lithium prices will remain at current levels and then move toward a long-term price of $13,600 a ton, the consultancy forecasts. This suggests lithium prices and the share prices of major lithium producers are highly dependent on a very uncertain metric.

Source: Frost & Sullivan via the Financial Times

Uptake of electric cars has consistently underperformed expectations, so exceeding SQM’s current valuation of about $4.7 billion requires a big and bold bet on EVs and hybrids. The Financial Times quotes Ben Isaacson, an analyst at Scotiabank in Toronto, who said SQM’s share price reflects lithium prices well above the marginal costs of production, “which isn’t realistic.” The lithium price will fall to a long-term average of between $8,000 and $10,000 a ton, he forecasts. “This should be bought at a discount (to the current lithium price) — this should not be bought at a premium,” he said.

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With new projects coming onstream in Australia, the U.S. and elsewhere, supply will increase, but so too, of course, will demand. But at current prices, the money is chasing new resource development and EV uptake appears to be lagging.

As one investor is quoted by the Financial Times as saying, “Why would you buy a $5 billion stake in a resource that is geologically abundant?”

Well, my point exactly.

Normally when supply is constrained prices will rise, but China’s steel market is presently at the mercy of several dynamics.

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On the one hand, Beijing is constraining polluting industries like steel and coke production. Those same policy decisions, however, are hitting industries that consume finished products, such as construction (at least in the industrial northeast, where environmental pollution action has been most active).

Arguably, steel prices would have fallen further as a result of the constraints put upon the construction industry if it were not for the the constraints put on steel production, which has restricted supply. What is difficult to gauge from official figures is quite how much impact restrictions due to environmental measures have caused and what, if any, impact of a relaxation of those restrictions will have.

Average Daily Steel Output Drops in December, Still Up 5.7% for 2017

According to Reuters, China’s average daily steel output fell by 1.9% in December to 2.16 million tons per day from 2.205 million the previous month. Even so, full year output in 2017 still rose 5.7% to 831.73 million tons.

In part, this is due to higher output earlier in the year boosting the annual number, but also because the National Bureau of Statistics has altered what it does and doesn’t include in its numbers. China closed an estimated 140 million tons of illegal induction furnace capacity in the first half of 2015, a sector that has not been included in production numbers because it is not approved.

The sector was significant though, and its loss during 2017 was a significant factor in the strength of rebar prices as conventional blast furnace producers ramped up rebar production and prices to take the place of lost output from these illegal induction furnace producers. Since then, Beijing has been encouraging state mills in the installation of modern electric arc furnaces (EAF), in large part because of their lower environmental impact. It is the growth of these EAF facilities that lifted production in the latter part of the year and contributed to a switch from pig iron to scrap as a raw material source.

Iron Ore Prices Show Volatility

Although China’s iron ore imports rose 5% in 2017, hitting a record of 1.075 billion tons, iron ore prices have show considerable volatility of late as speculators struggle to gauge what demand is going to be like once heating season restrictions are lifted.

Both iron ore and coking coal prices have been sliding in recent days, but the expectation is they will bounce back during the first quarter.

What happens after that remains to be seen.

With steel output restrictions lifted by late March, steel production will almost certainly increase, finished steel prices could weaken and steel mill margins could suffer. Q2 and beyond will depend on the strength of domestic demand, particularly from the construction sector.

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With new iron ore supply continuing to come onstream, it will be interesting to see if miners are able to maintain prices as demand picks up or if current concerns about port stocks prove right and an excess of inventory and supply results in prices falling further.

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This morning in metals news, weaker demand in China could counterbalance other forces that would push the prices of copper and aluminum up, the Chinese perspective on potential looming trade actions from the Trump administration, and new research has produced a “super-strong” aluminum alloy.

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Could Flagging Chinese Demand Put a Damper on Metals Rally?

Last year saw base metals prices rise significantly, particularly aluminum and copper. With labor negotiations going on at a number of Chilean copper mines and China’s government program of steel and aluminum capacity closures, one could expect prices to rise even further based on supply dynamics.

However, according to a Reuters poll, slowing Chinese demand could conspire to depress the gains that the aforementioned forces might otherwise produce.

According to a UBS analyst quoted by Reuters, copper demand growth in China should slow down this year. Similarly, as the world’s biggest aluminum consumer, any fluctuations in Chinese demand has significant ripple effects on the global aluminum market.

The Impact of Trade Action on China

An article in the South China Morning Post speculated on the impacts of pending U.S. trade decision — like the Section 232 probes of aluminum and steel imports — on the Chinese economy.

However, the articles cites the Section 301 probe — investigating intellectual property theft — as the biggest “Trump card” in the U.S.’s arsenal.

According to Derek Scissors, a trade specialist at the American Enterprise Institute, the article quotes him as saying the Section 301 probe could “justify sweeping American sanctions” worth “many billions” of dollars on Chinese telecoms and semiconductor products, including consumer electronics.

A Stronger Aluminum Alloy

Research at Purdue University’s School of Materials Engineering has produced a “super-strong” aluminum alloy that rivals stainless steel in strength, according to phys.org.

A paper on the research was published Jan. 22 in the journal “Advanced Materials,” according to the report.

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According to Purdue professor Xinghang Zhang, the stronger, lightweight alloy could “revolutionize the automobile and aerospace industries,” Zhang was quoted as saying.

The 2017 calendar year saw copper heat up in a big way.

According to MetalMiner IndX data, LME primary cash copper was $5,512/metric ton on Jan. 1, 2017. It closed the year at $7,215/mt, good for a meteoric rise of 30.9%.

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Not surprisingly after a strong run, the metal tracked back a bit in the early days of 2018, as our Irene Martinez Canorea wrote in her Copper Monthly Metals Index (MMI) Report earlier this month. LME copper opened the year at $7,180.50, and closed Jan. 17 at $7,045.

LME copper has tracked back slightly in 2018. Source: lme.com

Nonetheless, the point is simple: 2017 was a strong year for copper prices (which isn’t music to consumers’ ears). It took a while, but prices finally recovered after slumping through 2014 and 2015 — on Dec. 18, 2017, LME copper hit $7,215 for the first time since February 2014.

LME copper hit its highest mark in late December since February 2014. Source: lme.com

Obviously, copper has been trending up. Whether it can continue to maintain that pace remains to be seen, but we can look to 2018 and what is in store for the metal on a macroscopic level.

In that vein, the Copper Alliance posted its list of the top five copper trends for 2018.

The Alliance cites the following as the biggest trends: growth of the electric vehicle (EV) market, water delivery challenges around the world, rising electrification, renewable energy and the rise of “resilient buildings.”

The common denominator here? Copper is going to be marked by a tinge of green, not just in 2018 but in the future thereafter.

Copper and EVs

“EV technology is heavily reliant on copper, and copper demand for EVs is expected to increase from 185,000 tons in 2017, to 1.74 million tons in 2027,” the Copper Alliance list states.

If you’re doing the math at home, that would mean an 840% rise in copper demand for EVs. We are still not quite in a world where traditional combustion engine vehicles can be tossed aside for AVs; nonetheless, there’s no doubt copper has a notable role in tandem with the imminent rise of EVs.

Piping for Water Delivery

The list touts copper’s efficacy as piping for water transport, as opposed to lead.

“As a durable, reliable, and long-lasting metal, copper is particularly useful in the construction of water pipe infrastructure,” the list states. “It is also impermeable and prevents contaminants such as petroleum, insecticides, and fertilizers from polluting the water system.”

Renewable Energy, Sustainable Buildings

Copper will also have a big role in all things renewable, the Alliance’s list argues.

Wind turbines use copper for “grounding wires, power cables, transformers, inverters, lightning protection, and as part of generators and control systems.”

Copper will also play a part in so-called “green construction,” as the Alliance cites China and the European Union’s efforts to promote building sustainability as evidence of copper’s growing importance.

“The applications of copper in building construction are nearly endless,” the list says. “Some of the uses include roof and wall cladding, flashing, gutters and downspouts, wiring, plumbing, heating systems, ventilation, and design elements.”

What About Union Contracts?

Although this one wasn’t included on the list, it is something for copper watchers to monitor in 2018: labor negotiations.

A number of copper union contracts in copper giants Peru and Chile are up for negotiation — if enough of those hit an impasse, it could put a squeeze on supply and, thus, push prices upward.

Some labor disputes have been resolved in recent weeks — like at Lomas Bayas and Quebrada Blanca — but strikes can hit at any time.

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Cochilco, Chile’s state copper mining commission, raised its average 2018 copper price forecast from $2.95 to $3.03, Reuters reported, based on the possibility of supply disruptions.

This morning in metals news, the metals supply situation is complicated, Russian steel producer NLMK‘s output rose 3% last year and copper dropped the most it had in almost six weeks.

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What is the Supply Situation?

According to Reuters, stocks of metals in LME industrial warehouses fell by 40% last year, meaning tighter supply and a subsequent rise in prices — at least, that’s the conventional wisdom.

But when it comes to the global picture, it isn’t that simple. According to Reuters, some smaller exchanges aren’t experiencing such drops in inventory, which balances out the supply picture.

For example, warehouses monitored by the Shanghai Futures Exchange (ShFE) went up, as did CME Group warehouse inventories in the U.S.

As such, according to the report, only lead and zinc really fit the bill vis-a-vis being tagged with the tight supply label.

NLMK Sees Output Rise in 2017

The Russian steel producer said its 2017 production rose 3% last year, according to Reuters.

NLMK’s crude steel output amounted to 17.1 million tons last year.

Copper Posts Biggest Drop Since Early December

Is the rally coming to an end for copper? It’s a little early to make that declaration, but according to Bloomberg the metal posted its biggest drop Tuesday since Dec. 5.

Copper dropped 1.8% on Tuesday to $7,078 per ton, according to the report.

The metal, often dubbed “Dr. Copper” for its ability to serve as an indicator of overall economic health, had a strong December. However, 2018 hasn’t been as kind.

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LME copper closed Dec. 1 at $6,733 and closed Dec. 29 at $7,156.50 (a rise of 6.3%). In the new year, however, the metal has tracked back, hitting $7,022 as of Wednesday morning, according to MetalMiner IndX data.

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This morning in metals news, two new vehicles made mostly with steel represent a victory for the steel industry, iron ore prices are down and the U.S. International Trade Commission (ITC) voted to continue its investigation into common alloy aluminum sheet from China.

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New Ram Pickup, Chevy Silverado Made with Steel

As the steel industry battles to remain the dominant material in automotive construction, the news of two new models constitutes a win for the industry.

Fiat Chrysler‘s new Ram pickup and General Motors‘ new Chevrolet Silverado truck are made mostly with steel, Reuters reported. The announcements represent a big win for steel, which is seeing increasing competition from aluminum within the automotive industry.

As Reuters reported, in late 2014 Ford launched the all-aluminum body F-150. While the versatile metal offered improved fuel economy, it comes at a premium to steel. The interplay between steel and aluminum vis-a-vis automobile construction is something that will need to continue to be monitored going forward.

Iron Ore Prices Drop

As Chinese rebar steel futures fell, so too did prices of iron ore in the face of flagging demand, Reuters reported.

Iron ore on the Dalian Commodity Exchange dropped 2.3% to 535 yuan per ton, according to the report.

ITC Continues Aluminum Sheet Investigation

The U.S. ITC announced Friday that it voted to continue its investigation of common alloy aluminum sheet from China.

“The United States International Trade Commission (USITC) today determined that there is a reasonable indication that a U.S. industry is materially injured by reason of imports of common alloy aluminum sheet from China that are allegedly subsidized and sold in the United States at less than fair value,” the ITC release covering the announcement states.

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Now, a preliminary countervailing duty determination is due Feb. 1 from the Department of Commerce.

LME nickel prices hit $13,200 per ton last Wednesday, the highest level since June 2015 before investors took profits and the price fell back a touch to $12,870 per metric ton.

Prices were led higher by the ShFE, where stock have fallen to 48,920 tons from over 90,000 tons just a year ago — and consumers are worried about a supply squeeze, Reuters reports.

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The Philippines’ ongoing environmental campaign has perpetuated the closure of four key nickel mines in the Zimbales region, according to Wilfredo Moncano, the director or the Philippine mines and geosciences bureau. Moncano said “no extraction, no new mining activities, what’s only allowed is hauling up ores for their stockpiles,” according to Reuters.

The supply squeeze story has been exacerbated by news that Sumitomo Corporation has suspended output from its mine in Madagascar following a cyclone.  Not surprisingly, investment funds are at increased net long positions on the NME and SHFE, with LME positions doubling from early November. LME nickel stocks are still substantial at 368,292 tons, but are down from levels above 470,000 tons in June 2015; however, they’re at double the levels seen in May 2013.

Although nickel prices have pulled back on profit-taking, many are still betting the price could move higher as the market is in deficit. Any supply-side disruption is seen as an opportunity to squeeze supply in the face of continued robust demand.

Nickel supply, however, has picked up.

Current short-term issues accepted, according to Fast Markets, Indonesia had awarded quotas for the export of over 20 million tons of nickel ore after its export ban was relaxed early last year. Only a small portion of this, however, has been shipped. The bulk of 2017 quotas are still to be exported.

The incentive for both miners and authorities is to resolve the current environmental stumbling blocks. Exports are expected to pick up. There should also be nickel pig iron smelters being established in Indonesia in 2018, creating more plentiful NPI availability in the market.

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Under the circumstances, the recent $13,200 price spike may, if not prove to be a peak, at least come to be in the upper range of what will remain a volatile market until supply concerns ease.