Author Archives: Raul de Frutos

If I was a copper miner, I would be rubbing my hands because copper prices are looking healthy as a horse.

Supply Disruptions

Workers at Cerro Verde mine in Peru walked out on Friday, “halting output of 40,000 metric tons per month in a dispute over labor conditions,” according to news.com.au (here’s a video interview and analysis I did about it for Swiss Financial Television). The strike stretched into its fourth day yesterday after a meeting between the union and management failed to resolve it on Monday. “The mine is currently making about half as much copper as it normally does, because owner Freeport-McMoran hired contract workers to operate key areas,” said a union official as quoted by Reuters.

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

On top of this, disruptions at the world’s two largest copper mines, Escondida in Chile and Grasberg in Indonesia, are causing them to “lose production daily due to a strike and an export ban respectively,” according to Reuters.

The Technical Picture

Three-month London Metal Exchange copper. Source:MetalMiner analysis of fastmarkets.com data.

The technical picture is important because it tells a lot about what buyers and sellers are doing. Copper rose nearly 30% in November. Usually, after such a huge run it’s normal to see some selling but we haven’t really seen that yet.

Two-Month Trial: Metal Buying Outlook

Since November, prices are holding pretty well and that’s a sign that bulls are still in control. A sharp price decline in oil prices last week would normally bring other commodities down but copper held its ground well. The red metal continues to make higher highs and higher lows, a textbook definition of a healthy uptrend.

What This Means For Metal Buyers

The diagnosis is that while copper’s bull market doesn’t show real signs of weakness, we continue to expect further upside moves. Buyers should keep an eye on the ongoing supply disruptions because they could hurt your budget.

Last week, the Philippines’ mining industry “expressed its confidence that the Commission on Appointments (CA) will reject Gina Lopez as the Environment secretary,” according to Philstar.com, since she was unable to win the committee members over. Lopez is among “just a few of President Rodrigo Duterte’s appointees yet to be confirmed by lawmakers,” according to a Reuters article. Nickel prices fell 10% as bears believe there will be a rejection.

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

Nickel’s bull market started when Duterte became president of the Philippines in June. Prices gained throughout the year as Lopez led an environmental crackdown on the Philippine mining industry.

Developments in the nickel industry. Source: Raul De Frutos/MetalMiner analysis of LME data.

“The Philippines is the top nickel ore exporter and Lopez’s approval would probably sustain worries over supply disruptions that could lift global prices” this year, according to Reuters. On the other hand, a rejection would give miners a key win in the battle against environmentalists, adding pressure to nickel prices.

Two-Month Trial: Metal Buying Outlook

President Duterte continues to throw support to Lopez, but at the same time he is hoping for a happy compromise between environmentalists and the mining industry, amid rising concerns over job and revenue losses. Read more

Aluminum led industrial metals in February. Prices on the London Metal Exchange rose above $1,900 per metric ton for the first time since May 2015.

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

In February, China finally approved its Air Pollution Control regulations, which came into effect on the March 1.The world’s largest nation-producer of the metal will force about “a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter,” according to Reuters, which runs from the middle of November through the middle of March.

Aluminum MMI

The idea was first proposed in January and initially there was skepticism. Markets know that in the aluminum industry it takes time to ramp down and ramp back up production with smelters taking significant losses. This time, China is committed to enforcing the new law and it will prevent local authorities from protecting local smelters.

Capacity Crunch

Some 40% of China’s total capacity is potentially affected and analysts estimate that a 1.3 million mt of output will be lost. However, this figure could be larger since the new law will also impact the supply of raw materials such as alumina and carbon anode plants. Other industry analysts see a loss of 3 mmt of aluminum capacity. Read more

Our stainless MMI gained in February as nickel prices rebounded. Prices had fallen in December and January as Indonesia relaxed its ban on exports of nickel ore. But nickel bulls ran over the bears last month as the Philippines ordered more mine shutdowns. As we expected, the shutdowns in the Philippines are a great driver of prices.

Stainless MMI

On February 2, the Philippines ordered the closure of 21 mines, and seven others could be suspended. The nickel mines recently ordered to shut down account for about 50% of the country’s annual output. As a result, investors sent nickel back to $11,000 per metric ton by the end of February.

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

Stainless buyers will need to monitor nickel’s supply. These two major producer nations’ actions will continue to move the gauge on price direction this year. Meanwhile, the demand side of the equation will likely limit any significant downside in nickel prices this year.

The Caixin Manufacturing PMI in China beat market expectations in February, rising to 51.7 from 51 in January. It marked the eighth straight month of growth, driven by faster rises in output and new orders. In addition, stock markets in China hit new highs, signaling that investors’ sentiment on China’s economy remains strong. This is usually a bullish sign for industrial metal prices, including nickel. This relationship has been really strong since China became the world’s top producer and consumer of commodities. In the U.S., the closely watched ISM manufacturing index hit 57.7 in February, marking the highest level since August 2014.

Two-Month Trial: Metal Buying Outlook

Also in February, the Department of Commerce placed final, affirmative anti-dumping and countervailing duties on imports of stainless steel sheet and strip from China. Domestic flat-rolled mills are benefiting from these actions, with lead times of eight weeks.

What This Means For Metal Buyers

Industrial metals continue to rise on robust demand and shrinking supply. The supply/demand fundamentals of the nickel industry look more complex than those of other base metals. However, higher import duties in stainless markets and the ongoing bullish sentiment on industrial metals will at least, prevent nickel prices from significant downside moves.

Exact Stainless MMI and Nickel Prices, Trends

The Allegheny Ludlum 316 stainless surcharge rose 1% to $0.73 per pound. The 304 stainless surcharges remained flat at $0.59 per pound. The price of Chinese primary nickel surged 10% over the month to $13,056 per metric ton. The three-month nickel price on the LME also rose 10% in February to $10,940/mt.

Copper prices remained supported in February, trading in the ballpark of $6,000 per metric ton as a return to production at two top mines — which are combined responsible for some 8% of global output — looks increasingly doubtful in the near term.

Escondida Mine

A strike at the Escondida in Chile, the world’s largest copper mine, appeared far from ending during February. The strike increasingly turned more violent as protesters blocked roads and battled police. The events reflect the increasing bitterness and division between the two sides, as positions still appear to be far apart after almost four weeks of strike. Key differences include disagreement over changes to shift patterns and the level of benefits new workers receive.

Grasberg Mine

Meanwhile, Freeport-McMoran is under a concentrate export ban as it negotiates a new operating license from the government of Indonesia. Having limited storage capacity, the company will be forced to drastically cut output if Indonesia doesn’t give the company an export license to send material to its local smelter for processing.

Copper MMI

In late February, “the company announced that it sees ‘no returning to business as usual,’ as the miner cut output and laid off workers,” according to Reuters. “Copper concentrate production” at the mine “has been stopped since Feb. 11, and ore output is being limited to stockpiling for future processing,” the news service reported.

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

As reported by Reuters, in a memo, the company stated that during February it revised its operating plans, slowed its underground expansion and announced plans to drastically reduce manpower levels in an effort to cut costs as the company needs to survive while it works with the government to achieve a mutually viable solution to resume exports. So far, that agreement doesn’t seem close to coming together in the near term.

Two-Month Trial: Metal Buying Outlook

This year, there will be other temporary suspensions at smaller copper mines such at El Soldado mine in Chile. In addition, some major contract negotiations in large mines are due this year.

What This Means For Metal Buyers

Copper prices might look expensive compared to what they were just three months ago, however sentiment in the industrial metals complex remains quite bullish and current supply issues could “turn into large deficits if stoppages and disruptions are prolonged,” according to a different Reuters report. It’s seems early to call for an end on copper’s bull market.

Steel prices have been on a tear since November. However, prices came under pressure in early February.

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

After having lost some ground over the past month, U.S. steel companies now seem to be pushing for another round of price hikes. But, can U.S. steel prices rise from current levels?

Production Rises

In February, new findings by Greenpeace East Asia and Chinese consultancy Custeel stated that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016, according to Reuters. The report “suggests that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating,” according to the Washington Post. For 2016, China saw a net increase of 37 mmt of operating capacity, according to the Greenpeace East Asia/Custeel report.

Raw Steels MMI

According to data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago. Read more

Copper prices are trading near $6,000 per metric ton, up 30% from just four months ago. Things can change quickly and I don’t know where prices will be by the end of the year, but what’s clear to me is that most analysts’ forecasts seem way off. According to a recent survey polled by Reuters, copper analysts are are expecting prices to average $5,350/mt this year.

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

In my opinion, this is a very conservative price average and quite bearish due to what Behavioral finance calls “anchoring,” the human tendency to attach or “anchor,” our thoughts to a reference point even when it makes no logical sense. Analysts see that copper prices have risen significantly and quickly, so they anchor the new price of $6,000/mt onto the $4,500/mt level where prices were trading at just a few months ago. This creates the idea that $6,000/mt is an expensive price for copper and, for this reason, you will almost see no one but me calling for an average above $6,000/mt this year. Read more

Gold prices have gained 9% this year, recouping a healthy amount post-U.S. presidential election.

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

A stronger dollar and expectations for economic growth drove investors out of the safe-haven asset. What’s now sending investors back into gold? and, is this gold rally the beginning of gold’s revival or just a dead cat bounce?

Buying The Dip

Gold rises in 2017. Source:MetalMIner analysis of @stockcharts.com data.

Although a 9% increase might look impressive, it really isn’t. Gold previously lost $180 per ounce in less than two months. After such a big slump it’s normal see a price rebound since many investors will see the significant dip as an opportunity to buy gold at a discount.

To me, this doesn’t mean that gold’s underlying fundamentals have improved. Prices still have yet to test stiff resistance near $1,300 per ounce. This rally could lose steam in March.

The US Dollar

The US Dollar Index since March 2016. Source: MetalMiner analysis of @stockcharts.com data.

Perhaps, the single factor contributing most to this year’s gold rally is a weaker dollar. Weakness in the dollar also comes because the currency rose very fast in the last quarter of 2016. In addition, President DonaldTrump made comments that he desires a weaker dollar and that has also weighed down the currency.

Last week, Federal Reserve officials said they plan to raise rates “fairly soon,” but “they left investors doubting that the central bank will act at its March meeting,” according to a piece on Dow Jones newswires. “The Fed raised interest rates in December and cited plans to raise rates as many as three times in 2017,” according to that story. Gold usually suffers under higher rates, since the precious metal becomes less “less attractive compared with yield-bearing assets when borrowing costs rise,” according to Dow Jones.

Two-Month Trial: Metal Buying Outlook

This month the dollar seems to be finding some support. We’ll have to wait and see if the currency can resume its bull market run, which would be quite bearish for gold prices.

Stock Markets

The S&P 500 hits all-time highs. Source: @Stockcharts.com.

As a CNBC.com article puts it, “Trump has frequently told U.S. citizens he remains committed on both tax reform and regulatory cuts since entering the White House, which has created optimism among investors.” We already presented the case for a bull stock market back in January.

A Trump administration for the next four years might be just what the doctor prescribed to keep this aging bull stock market going, even with seven-plus years of gains behind its back. At least that’s what it looks like thus far. U.S. stock indexes are trading at all-time highs, which is not helping gold as a safe haven.

What This Means For Metal Buyers

The recent strength in gold prices is something to keep an eye on. However, keep in mind that this rally might just be a dead cat bounce. A rising stock market, a healthy U.S. dollar and gold prices meeting resistance are factors that could keep a lid on gold’s rally.

US hot-rolled coil prices retrace. Source: MetalMiner IndX.

Since November — Coinciding with Donald Trump’s victory — U.S. steel prices have been on a tear.

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

However, in February momentum started to cool down. It’s now buyers’ job to determine whether this is a major peak or just a pause within this bull market.

Chinese Steel Capacity Rises in 2016

In February, a report by Greenpeace East Asia and Chinese consultancy Custeel “stated that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016,” according to Reuters. In its reporting, the Washington Post noted that the co-authored report “says that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating.”

Meanwhile, some 49 mmt of capacity that had previously been suspended was restarted, and 12 mmt of new operating capacity came online. That means that China added 37 million metric tons additional operating capacity in 2016.

Hot-rolled coil prices in China also take a pause. Source: MetalMiner IndX.

This news is bearish for steel prices and it is likely contributing to lower steel prices in February, both in the U.S. and China. Read more

The 3-month London Metal Exchange lead price is still climbing. Source: Fastmarkets.com.

Lead has had a pretty wild ride over the past few months. After a big run in 2016, prices sold off in December, offering buyers a great opportunity to buy the metal as prices pulled back.

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Prices are now back near new highs as bulls seem to be taking control again. For reasons we’ll see below, we expect momentum to pick up again on the upside.

Global Lead Refined Production and Usage. Source: MetalMiner IndX.

According to the International Lead and Zinc Study Group, in 2016 refined lead supply exceeded demand by 11,000 metric tons in the global market. Read more

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