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Since the beginning of March, steel prices in China have fallen sharply while prices in the U.S. have risen. That is simply not sustainable.

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These price divergences happen once in a while but they don’t last long. Over the next few weeks we’ll either see a rebound in Chinese prices or weakness in US steel prices.

US HRC (in blue) vs. Chinese HRC (in purple). Source: MetalMiner IndX.

Why do we say this? Well, China’s output accounts for more than 50% of world steel production. Currently, China isn’t a major exporter to the U.S., but it is the biggest exporter to the rest of the world. Therefore, Chinese prices put a floor under international steel prices.

Two-Month Trial: Metal Buying Outlook

Since prices peaked in February, China’s hot-rolled coil prices have fallen nearly 15%. During the same period, U.S. HRC prices have risen nearly 8%. Interestingly, we saw a similar divergence last summer, when the U.S. imposed strong anti-dumping measures against imports. Such a wide international price arbitrage didn’t last long, as we predicted last year, this price arbitrage narrowed after that summer.

CRC price arbitrage US-China. Source:MetalMiner IndX.

U.S. steel prices are now expensive again relative to Chinese prices. In the case of cold-rolled coil, the price spread stands now at $344 per metric ton, quite high compared to historical levels and not far from last summer’s peak of $420 per mt. A level that has proven unsustainable before.

What This Means For Metal Buyers

We continue to be long-term bullish on steel markets. However, buyers should closely monitor the recent divergence between Chinese and US prices. We should see a recovery in Chinese steel prices soon, otherwise US steel mills will have a hard time justifying further price hikes. Remember that we are in a global world and although US steel prices can temporarily move apart from Chinese prices, they will eventually move in tandem because otherwise, buyers will start looking to buy steel overseas.

Palladium has been the best performer among precious metals for some time now. Since the beginning of 2016, palladium is up 65%, easily beating the price increases seen in platinum, gold and silver.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

What factors made palladium outperform its peers and what should palladium buyers pay attention to this year?

Global Demand for Cars

According to Inside Advantage’s Outlook 2016 report, “the primary bullish factor might be the expansion of auto catalyst demand for palladium, particularly in China where air pollution problems are increasing. The auto sector accounts for around 80% of palladium demand.”

Chinese car sales for the first two months of 2017 beat expectations and were 8.8% higher compared to the same period in 2016. According to a Market Watch report, the pace is still weaker than the 14% increase reported last year by the industry as tax incentives urged customers to buy cars. In Q4 of 2016, China announced a 50% cut in its sales tax from 10% to 5% for small automobiles. The tax cut was effective until the end of 2016.

Most analysts were expecting a big slowdown in the largest automobile market this year, but China continues to surprise markets. The country agreed to extend the cut, although at a higher rate of 7.5%. In 2018 it will revert to 10%. Therefore, while auto sales might not beat the high levels reached last year, Chinese citizens will still likely take advantage of a lower tax in 2017.

According to a recent Reuters article, “March’s figures for the world’s second-largest automotive market came in below market expectations and gave early evidence that the growth in America’s car sales may be running out of steam. Sales in March fell by 1.6% compared with the same month a year ago.”

Overall, auto markets were really strong in 2016, contributing to a 50% rise in palladium prices last year. This market might surprise again in 2017 but signs of a plateau in the U.S. and uncertainties in China due to an extended but higher tax cut are factors to watch this year.

Strong South African Currency

South African Rand Index. Source:MetalMiner analysis of @stockcharts.com data.

South Africa is the largest producer of palladium, and controls around 40% of world output. The Rand (South African currency) has been one of the best performing currencies since 2016. A rising Rand makes South African exports more expensive to the rest of the world, limiting producers margins and potentially leading to a reduction of output. Read more

China’s aluminum industry is under siege. You wouldn’t think so from the booming production figures, rising prices and howls of protest from aluminum producers in the rest of the world.

Benchmark Your Current Aluminum Price by Grade, Shape and Alloy: See How it Stacks Up

But, arguably, China’s aluminum industry is the victim of its own success.

Liquid metal

The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.

On the one hand, the political heat is rising as China’s production capacity has exceeded 50% of global output even as a combination of low aluminum prices and the collapse of physical delivery premiums in recent years has forced producers in the rest of the world to rationalize production, mothball plants and shelve capital investment plans that do not seek to simply slash costs.

Rise of Semis Buoys Industry

The rise of Chinese semi-finished product exports has stimulated a wave of legal challenges around the world alleging unfair trade practices and causing considerable uncertainty for Chinese manufacturers with aspirations beyond their own shores. Read more

I get it, you are thinking of what you are going to get your family for Christmas. However, Santa is bringing you good opportunities to buy some metals. Don’t miss them.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Base metals entered a bull market earlier this year. The real driver of this bull market has been the stronger-than-expected Chinese demand. Markets underestimated Beijing’s determination not to disappoint on its growth numbers. Thanks to the country’s increase in infrastructure spending, industrial metal prices are getting a tailwind.

The metals rally particularly extended in November. However, prices don’t just move in a straight line. If they move up quickly, buyers are tempted to take their profits until markets digest those gains. This is normal price action and why we normally see prices moving in a zig-zag. In the second half of December, there’s already been some profit taking and as prices pull back, buyers can find good opportunities to time some purchases. Let’s take a few examples:

Copper

Copper prices could find support soon

Copper prices could find support soon. Source: MetalMiner analysis of Fastmartkets.com.

Almost no analyst was bullish on copper prior to this rally, but it seems that the market now sees the possibility of a market deficit next year as almost no supply is due to come on-stream while demand seems robust.

Copper prices exploded in November. After this stellar rally it was normal to expect some selling pressure. However, if the bulls are still in control, they should come back to support prices soon. If prices start to rebound from these levels, copper buyers will find a good opportunity to buy some volume.

Zinc

Zinc prices pullback near support levels

Zinc prices pullback near support levels. Source: MetalMiner analysis of Fastmarkets.com data.

According to the International Lead and Zinc Supply Group, the global market for refined zinc metal was in deficit by 277,000 metric tons from January to October 2016 with total reported inventories falling by 53,000 mt over the same period. The Group anticipates that global usage in 2016 will exceed production by 349,000 mt and expects the market to remain in a deficit of 280,000 mt next year.

During this year’s rally, zinc buyers had several opportunities to buy forward. Buyers now need to pay close attention to the recent price pull back. If you see a rebound in prices near that support level, that would be a good time to buy some volume.

Lead

Lead prices pullback near support levels

Lead prices pullback near support levels. Source: MetalMiner analysis of Fastmarkets.com data.

Zinc’s cousin, lead, is also retracing near an area where we should see investors coming in to support prices. If this year’s bull market is set to continue, which for now we continue to expect it to do so, lead buyers will find a good opportunity to time their purchases if prices rebound at these levels.

Nickel

Nickel prices pull back near support levels

Nickel prices pull back near support levels. Source: MetalMiner analysis of Fastmarkets.com data.

The Philippines’ output of nickel ore fell 16% in the third quarter from a year earlier, as a result of several mine suspensions due to environmental violations. The country has already stopped work at 10 of its 41 mines, eight of which are nickel mines. 20 More mines, 14 of which mine nickel, could see their licenses suspended.

Two-Month Trial: Metal Buying Outlook

In December prices are retracing, but if this uptrend is to continue investors will likely find these levels attractive to buy nickel, lifting prices.

What This Means For Metal Buyers

Once you identify you are in a bull market, buying in the dips is usually a good strategy to satisify some of your metal requirements. As metal prices pull back in December, metal buyers might find good opportunities to time purchases if momentum turns upwards again.

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Tin cans. Cans are used for packing all sorts of goods - conserved food, chemical products such as paint, etc

Tin cans. Cans are used for packing all sorts of goods – conserved food, chemical products such as paint, etc

Tin prices, along with nickel, weakened last week on the non-ferrous metals market due in part to reduced demand from alloy industries.

According to a report from the Business Standard, owners of metal stocks sold en masse from this lower demand, affecting both tin and nickel with copper prices also softening from a lack of demand.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

To begin December, our own Stuart Burns wrote of tin’s continued bull run even with an abundant supply.

Burns wrote: “(Tin) is also relatively well distributed: the five largest producing countries are China 35%, Russia 12%, Australia 8%, Indonesia 7% and Brazil 6%, according to Platts. These mines are not in unstable or war-torn regimes. Some mines in places such as Myanmar and the Democratic Republic of the Congo are less savory, sure, but as a percentage of the whole they are not mission critical to global ore supply.”

Risk with Tin

There is some inherent risk with tin since both supply and demand are not presently driving prices.

Burns concluded: “That doesn’t mean to say the price hasn’t got further to go. There is no shortage of liquidity in the Chinese investment market and speculators this year have pushed not just tin but copper and other metals to annual highs. Tin’s fundamentals aren’t bad by any means but the FT reports that nearly 30% of Chinese smelter capacity sits idle today, a warning sign that high prices may not be matched by downstream demand.”

How will tin and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Gold rises as a safe haven when investors fear a recession, inflation increases or the U.S. dollar plummets, making the precious metal cheaper for foreign investors.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Well, none of these things are happening right now. Indeed, quite the opposite is happening. Gold prices fell to their lowest level in nine months. What’s driving gold’s decline?

Gold prices hit a nine-month low

Gold prices hit a nine-month low. Source: MetalMiner analysis of @stockcharts.com data.

The Case For A Bull Stock Market

To be honest, I’ve been pretty skeptical of the U.S. stock market. Markets indexes have traded sideways for almost two years. Still, they have avoided a severe bear market. The day Donald Trump was elected, markets opened sharply lower as fear consumed traders. But stock markets love to do the unexpected and indexes are now back to trading in record territory.

S&P 500 surges following Trump victory

The S&P 500 surges following the Trump victory. Source: MetalMiner analysis of @stockcharts.com data.

Such action is a hint that equity trading desks and large funds aren’t finished buying stocks yet. The question is: will Donald Trump’s presidency for the next four years be just what the doctor prescribed to keep this aging bull stock market going, even after seven-plus years of gains behind its back? Could the rise in equities even accelerate?

That’s too big of a guess. However, going back in history we noticed that in 1982, the stock market was on what it looked like the cusp of a major bull market. But soon after, the new president — Ronald Reagan — slashed taxes and unleashed a super bull market that lasted until the year 2000.

Not saying that history will precisely repeat itself, but the investing crowd is already making some strong bets even before Trump becomes president in January. So far, that hasn’t helped gold as a safe haven.

The US Dollar Hits a 13-year High

Perhaps, the biggest factor driving gold prices south is a surging dollar.

Dollar Index rises to the highest levels in 13 years

The US dollar Index rises to its highest levels in 13 years. Source: MetalMiner analysis of @stockcharts.com data.

The U.S. Dollar Index, which tracks the performance of the dollar against a basket of currencies, continues to rise following President-Elect Donald Trump’s victory.

Investors expect Trump’s proposals to boost fiscal spending, cut taxes and loosen regulation. They also believe he will accelerate economic growth and boost inflation, bolstering the case for the Federal Reserve to raise U.S. interest rates. Expectations for an interest-rate hike in December’s meeting have risen to more than 90%, up from 30% at the beginning of the month. Higher rates make the currency more attractive for yield-seeking investors.

Two-Month Trial: Metal Buying Outlook

A rising dollar depresses commodity prices, especially precious metals. It does have less of an effect on more economically-sensitive groups like energy and industrial metals. Indeed, industrial metals are on the rise despite a strong dollar. This is because the dollar is rising on expectations of higher rates down the road but, at the same time, metal prices are getting an additional boost because of Trump’s plans to spend big on the nation’s infrastructure. However, gold’s demand won’t be affected by infrastructure spending. As a result, investors are left without reasons to buy gold at this moment.

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Black lead zinc ore closeup rocky textureThe International Lead and Zinc Study Group recently convened in Portugal to deliver its forecast for the coming year, and revealed that global demand for refined lead metal is expected to rise 2.8% this year and 1.3% in 2017.

The report continues: “In China, strong growth in vehicle production and sales have helped to balance declining demand for lead-acid batteries in the e-bike sector where sales of lithium-ion batteries are reported to be rising. It is anticipated that Chinese lead usage will rise by 2.5% in 2016 and 1.1% in 2017.”

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

Furthermore, European usage of lead metal is expected to increase 5.3% this year after declining in 2015. This is due in part to positive performance from the automotive sector. It’s important to add that lead demand in Europe is expected to remain flat next year.

Pertaining to supply, global lead mine supply this year is forecast to be less than a half percent lower than in 2015 with a boost in China offset by other nations, including Australia, Mexico, India and the U.S. In the coming year, global lead output is expected to rise 3.3%.

Global Refined Lead Metal Balance

In closing, the ILZSG report states: “Having taken into account all of the information recently received from its Member Countries, the Group anticipates that in 2016, supply will exceed demand in the global refined lead metal market by 42,000 tonnes. In 2017, an even closer balance is predicted with current data indicating that the market will be in surplus by 23,000 tonnes.”

How will lead and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Just when life was getting good for Indian steelmakers, the price of coking coal goes up.

Free Download: The October 2016 MMI Report

The increasing price of global coking coal, a key ingredient in steelmaking, may squeeze Indian steelmakers’ profitability and deepen financial risks, according to a Fitch Ratings report. Prices had crossed the $190-a-metric-ton mark recently. The steel companies risk will also increase if the high prices persist while domestic steel demand growth remains low. Which essentially means that the increase in raw material costs for Indian steel producers may shrink their margins, if the rise is not passed on to consumers.

Coking Coal Imports

The bulk of India’s coking coal is imported to compensate for the lack of good quality coal from the country’s own mines. In addition to steel plants, the raw material used by coal-based power plants, cement plants, captive power plants, sponge iron plants, and almost all depend on importing non-coking coal.

Coke is imported mainly by pig-iron manufacturers and iron and steel sector consumers using mini-blast furnaces. India imported around 200 million mt of coal last financial year to top domestic production of 640 mmt.

Steel mills Molten iron smelting furnace production line

Steel mills in India are turning to new suppliers and reopened mines to provide coking coal with prices up. Source: AdobeStock/zjk.

So India, despite efforts by the government to reduce its dependence on foreign coking coal, has to import it from countries like Indonesia, South Africa, Russia and Australia. Coking coal prices in Australia have surged in the last few months, so what’s good news for that nation is bad news for India’s steel makers. Read more

 Lead pulls back following Q3 price rally. Source: MetalMiner analysis of fast markets.com data

Lead pulls back following a Q3 price rally. Source: MetalMiner analysis of Fastmarkets.com data.

Lead fell in October but the underlying trend looks strong. Let’s analyze why prices declined:

Strong Dollar In October

Dollar Index rises in October. Source: Metalminer analysis of stockcharts.com data

The U.S. dollar index rises in October. Source: Metalminer analysis of @Stockcharts.com data.

In October, the U.S. dollar index, which measures the greenback vs. a basket of major currencies, rose to its highest level in 9 months.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

A rising dollar has a negative impact on metal prices. Not only lead, but all base metals are feeling the downward pressure this month. Metals are priced in dollars and when the value of the dollar rises, it takes more of them to buy metals. Another reason is that when the value of the dollar rises, foreign buyers have less buying power, typically causing demand for metals to shrink.

Lead Needs To Consolidate Gains

Lead faces long-term resistance level

Lead faces long-term resistance level. Source: Fastmarkets.com.

Lead moved up sharply in Q3 and prices need to consolidate these gains. It is normal to see some profit-taking at these levels. Moreover, lead is at levels that prices couldn’t overcome last year. This is a level where it’s normal to see some selling pressure. Interestingly, its metal cousin zinc is doing the same thing.

What This Means For Metal Buyers

Lead prices are consolidating recent gains and a stronger dollar is weakening the bullish mood across base metals. Prices could continue to climb higher after this pause. Lead buyers should consider hedging some purchases.

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Copper prices started the year on a bullish note, amid positive sentiment in the overall industrial metals complex and rising Chinese imports.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Unlike other base metals, we haven’t really seen a decline in copper supply. Therefore, copper investors can only keep an eye on copper’s demand. China consumes nearly 40% of global copper demand. China isn’t self-sufficient when it comes to its copper needs and is the largest importer of the red metal. Rising Chinese imports signals increasing demand for the metal.

Last week, China released its trade data. In September 2016, China imported 340,000 metric tons of unwrought copper and copper products, down 25% from last year. Moreover, this is the sixth consecutive month where imports fell on a monthly basis.

3M LME Copper falls on weak Chinese imports

Three-month London Metal Exchange copper falls on weak Chinese imports. Source: MetalMiner analysis of Fastmarkets.com data.

Prices fell sharply following the release of the weak numbers. Investors still lack any good reason to push prices much above $5,000/mt, a level that has proven to be a ceiling for copper this year. So, while we don’t see supply cuts and demand appears stagnant, the best copper producers can expect is for prices to remain rangebound.

 

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