Author Archives: Raul de Frutos

Source: MetalMiner IndX

Zinc hit a record shortage in 2016. According to the International Lead and Zinc Study Group, zinc registered a deficit of 286,000 metric tons last year. Global usage of refined zinc metal rose 3.6% while supply remained pretty much flat thanks to a number of mine shutdowns.

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The tightening in zinc’s raw material segment accelerated last year thanks to the closure of big mines such as Century, Lisheen and Glencore‘s suspension of 500,000 mt of annual mine capacity. These closures have impacted the supply of mine concentrates drastically and, for the first time, we are seeing an impact in the refined metal market.

In February, according to a recent Reuters article, Korea Zinc Co. said this year, it would reduce its refined zinc output by 7.7% (or 50,000 mt). The company made its decision to cut output due to low declining treatment charges, which have plummeted to multiyear lows.

Prices at Multiyear Highs

Zinc is trading near multiyear highs. Source: MetalMiner analysis of Fastmarkets.com data.

As a result of this narrative of supply shortfall, zinc is trading at the highest levels in more than eight years. Bulls have been in such a powerful position that prices have barely retraced during this run.

Will China Cut Output This Year?

Reuters reported that zinc supply for the rest of the world also fell by 10% last year. However, production increased inside China. In 2017 investors will be closely monitoring China’s numbers. Although output rose, imports slumped by 38% last year. This, combined with falling treatment charges, suggests that a raw material shortfall is building in China as well. China must get serious about controlling industrial metals output to solve its pollution problems.

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The conclusion: China will need to cut refined zinc output.

The 3-Month LME aluminum price soars. Source: Fastmarkets.com.

Aluminum prices hit $1,900 per metric ton this week. Aluminum has surged 13% so far this year.

China Proposes Supply Cuts to Fight Pollution

We already predicted at the beginning of January that China’s supply would be the most important price driver to watch this year.

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According to Reuters, in February, a Chinese government document proposed an aluminum shut down for approximately a third of aluminum capacity in several provinces during the winter months. This shut-down would have a significant impact toward reducing pollution for some of China’s most polluted cities. Read more

Stock markets in China are up nearly 10% this year, outpacing a 4% gain in the S&P 500.

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President Donald Trump’s election victory in November raised worries that he might take a more aggressive stand against China, labeling them a currency manipulator and threatening to increase import duties on Chinese goods.

FXI China shares attempt to breakout. Source: MetalMiner analysis of @stockcharts.com data.

While these threats haven’t materialized yet, fund managers as well as investors appear to have focused on strong Chinese corporate earnings and positive economic indicators, rather than worrying about protectionism.

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When it comes to providing stimulus to meet growth targets, you can’t bet against China. But when it comes to cutting output, things can get obscure… literally.

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According to a new report by Greenpeace East Asia and Custee a Chinese consulting firm, China’s steel capacity in 2016 actually increased and not decreased despite the very public announcements of capacity curtailments. According to the report, 73% of the announced cuts in capacity had already been idled and therefore, not actually in operation. Steel capacity curtailments may have only involved 23 million metric tons of capacity that had been in operation.

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.

Production Up, Prices Up

Chinese Hot-rolled coil price climbs. Source: MetalMiner IndX.

After falling in 2015, Chinese crude steel output is now rising again at a healthy clip — it was up 4% on the year in the fourth quarter. Meanwhile, hot-rolled coil prices in China rose near 70% for the year. Despite resilient output, demand growth has been much more significant. As a result, Chinese steel exports have fallen double digits for four consecutive months.

Can Just Promises Sustain Rising Prices?

Sentiment in the steel industry is also bullish thanks to expectations of lower output this year. In January, China promised some major shut downs of low-quality steel by June of this year.

Eliminating excess steel capacity and restructuring the industry has enormous environmental significance because the steel industry is the second-largest emitter of air pollution in China. This is another reason to believe Beijing will strengthen its supply-side reforms this year.

However, according to the report most of the capacity elimination target set for the 2016-2020 period has, technically, already been achieved in 2016, meaning that capacity elimination in 2017-2020 will be much more modest unless targets are increased. Meanwhile, a 21 mmt capacity increase is still in the pipeline from new projects, and there is at least 42 mmt of existing idle capacity that could be used to fulfill the capacity elimination targets.

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These numbers give us reasons to doubt on what China can deliver this year. China is now under pressure to demonstrate progress on capacity cuts. But financial and legal incentives to keep marginal firms running will cause regulators to struggle to enforce capacity cuts. Chinese steel mills are so hard to get rid of as they are often a key source of local tax revenue and employment.

What This Means For Metal Buyers

The sustainability of the ongoing rising trend in steel prices will much depend on China. Buyers will need to keep a close eye on how much growth can China deliver and how much of the promised production cuts will actually materialize this year. The problem is that growth without controlling steel out will only translate into severe air pollution.

Last year, investors were wondering whether copper was worth more than $6,000 per metric ton or not.

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Late in 2016, prices were struggling to overcome this psychological level, but things are shaping up for 2017 to be a hot year for copper production, which could translate into a hot year for the copper price.

Upside momentum for copper prices picked up on supply disruptions. Copper rises above $6,000 per metric ton. Source: MetalMiner analysis of FastMarkets.com data.

Escondida Stops Production

Chile’s massive Escondida mine’s processing plants completely stopped supplying refined copper to markets on Thursday as no miners arrived for morning work. The mine produced around 1 million mt of copper last year, or 5% of global production. Read more

Our Stainless MMI inched lower in January but it’s already working higher in February as nickel prices rebound.

That Other Ban

In mid-January, Indonesia issued significant new mining rules that will relax its ban on exports of raw nickel ore.

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The revisions to the earlier regulation will allow miners to only export low-grade ore (defined as metal content of 1.7% or less) as long as they express a commitment to build their own smelters within five years and are able to supply domestic smelters with enough low-grade ore to meet at least 30% of the country’s input capacity.

Stainless MMI

This distinction between low-grade and high-grade ore (1.7% or more metal content) is important. Lower-grade ore increases the cost base for Chinese nickel pig-iron. In addition, NPI and ferronickel are more energy intensive than the higher grade refined nickel. Therefore, the greater use of lower grade nickel leads to more pollution, an issue that China is currently tackling.

According to a Reuter’s report citing Indonesia’s mining minister, of the 17 mmt of nickel ore produced by Indonesia each year 10 mmt is considered low grade while nickel smelting capacity stands at 16 mmt currently but could grow to 18 mmt this year.

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As its mining minister puts it, under the new rules, Indonesia could export up to 5.2 mmt of nickel ore in 2017. This is less than 9% of what the country used to export prior to the ban. Although this is important information to take into account, Indonesia’s easing will not flood the global market as many feared.

More Shutdowns In The Philippines

On February second, 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. Prices rose sharply on the news as the mining shutdowns in the Philippines seem likely to be a to greater driver of price movements than the easing of Indonesia’s export ban.

What This Means For Metal Buyers

If we narrow our view to the supply/demand fundamentals of the nickel industry, the picture looks bullish, but rather complex. However, we need to widen our view to the whole industrial metals spectrum, and that picture looks quite bullish. Industrial metals continue to rise on robust demand and shrinking supply. The bullish sentiment across the metal complex, combined with more nickel mine closures should support prices in the mid-term.

Tin prices plunged 9% since the year started, hitting a five-month low. There are two factors driving this decline:

  • Profit taking: Prices rallied near 70% in 2016 and prices need to digest those gains.
  • Speculation that China has removed it’s 10% export duty on refined tin exports.

After this decline, we believe buyers can now take advantage to time some purchases.

Prices Near Support

Tin prices are trading near key support levels. Source: MetalMiner analysis of FastMarkets.com data.

Technically, the recent price decline seems normal within the context of a bull market. In bull markets, buyers can find good opportunities to buy metal after prices pull back.

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Tin prices are now nearing a support area where traders will likely lift prices, especially given the ongoing bullish sentiment across the metals complex.

The Removal of an Export Duty is Not That Bearish

Some say that China’s removal of its export duty could have a significant impact but we don’t necessarily agree. If China was a net exporter of tin, and prices in China were lower than in the rest of the world (as is the case with steel), then the removal of the export duties would have a significant impact on the market balance. However, that’s not the case.

Tin primary cash China vs LME. Source: MetalMinerIndX.

China is a net importer of tin. In 2015 China produced 146,600 metric tons while it consumed 175,842 mt. In addition, prices in China are lower than those on the London Metal Exchange. Moreover, China is trying to curb local output of metal, including tin, to fight pollution.

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For these reasons, we can’t see why removing the duty would result in a flood of metal coming out of China. In anything, it will just encourage more refining.

What This Means For Metal Buyers

Tin price levels look attractive. Now it could be a good time to minimize your tin price risk and buy forward.

Copper prices rebounded to a 6% increase in January. The combination of a falling dollar and a potential work stoppage at the world’s largest copper mine lifted prices to test the psychological level of $6,000 per metric ton.

Base metals looked more bullish in January and strong Chinese data is no doubt driving that. China’s PMI was in growth territory for the seventh consecutive month. Here in the U.S., President Donald Trump signed executive orders to continue progress on two key energy pipelines, making good on his campaign pledge to rebuild the nation’s infrastructure.The new president also broke with protocol and expressed a desire for a weaker dollar.

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Trump’s words helped drive the value of the dollar down in January. This gave a boost to industrial metal prices and dollar-denominated commodities such as crude oil, which continues to remain supported above $50 per barrel. Read more

Our Raw Steels MMI rose 8% in January. Flat products achieved or came close to multiyear highs across the sub-index. In this post we will lay out some of the factors driving this price rally. A rally that we predicted three months ago.

Rising International Steel Spreads

In late January, President Donald Trump took executive action and approved to move forward the Keystone XL and Dakota Access oil pipelines.This will significantly increase U.S. steel demand from the energy sector.

The new president also issued another executive order that required them, and all pipeline projects, to use only American-made steel. There is no language in Trump’s memo that indicates any waivers for American-made steel would exist for trade-agreement countries. If this policy is adopted, for at least the next four years even by only the executive branch, it is, by far, the most stringent definition of “American-made” we have seen in federal steel procurement.

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With the expected increase in U.S. demand for steel and new “Buy American Steel” policies, the spread between U.S. and international prices could widen this year. Spreads bottomed at the end of November and it looks like there have room to rise again. Read more

In January, aluminum prices broke through the $1,800 per metric ton level. That was an important development signaling that bulls are taking over. Just a month ago we pointed out that prices had upside potential.

We believe the key this year will be on the supply side and not as much on the demand side. These are some factors that could limit growth in aluminum output this year:

Pollution in China

According to Reuters, a recent Chinese government document proposed a one-third aluminum capacity shutdown in key smelting regions including: Shandong, Henan, Hebei and Shanxi. The shutdowns would occur during the winter months. That sparked excitement among aluminum investors. These provinces account for over 20% of global aluminum output.

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In addition, late last month the country passed a law that will allow it to impose environmental protection taxes from January 2018, following an outbreak of hazardous smog in northern China where many industrial producers are located. Read more

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