Articles in Category: Global Trade

It’s still touch-and-go for the steel sector in China despite the sprouting of the first shoots of a possible manufacturing recovery. However, last Monday, benchmark iron ore prices in the country gained a surprising 7%. This is the biggest daily rise in two-and-a-half months. Is it a sign that we should be more optimistic, or is this just a dead cat bounce?

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bulk cargo iron ore

masterskuz55, 2022, AdobeStock

China’s Slow Road to Recovery

Chinese manufacturing activity has thus far been down in 2022 due to a fresh COVID-19 outbreak. However, since mid-May, the market has shown some signs of recovery, particularly in the country’s economic hub of Shanghai. Nevertheless, experts expect steel demand to remain lackluster until manufacturing production returns to normal in June.

S&P Global Commodity Insights reported that China’s manufacturing production index for steel consumption fell by 28 points from 2021 and 16 points from 2020. These aren’t exactly hopeful numbers, and experts are concerned about the pace of recovery despite the stimulus package.

India Playing Hard Ball on Tariffs with Iron Ore

The aforementioned 7% rise in iron ore futures is puzzling. Firstly, it comes on the heels of India raising export duties on some commodities to rein in inflationary pressures. Specifically, the country increased duties for iron ore and steel intermediates. This included raising new iron ores and concentrates tariffs from 30% to 50%. On the other hand, pellet duties went from zero to 45%. According to a report in the Financial Post, tariffs on coking coal and coke were removed altogether.

This week, the most-traded iron ore futures on the Dalian Commodity Exchange (for September delivery) were up 4.4% at $129.18 (864 yuan) a ton. This was after a surge of as much as 6.9%, the highest since May 6th. Some experts believe India’s move may not impact China’s iron ore inventories as much as initially thought. After all, it only represented about 3% of China’s total imports in 2021. The same goes for the first four months of this year. Overall, Chain’s purchase rate from the subcontinent has stayed low due to increasing demand in India & the falling iron ore prices.

Iron Ore Prices in China are up

News agency Reuters recently reported that we could see a new rally of iron ore prices. They specifically cited the Chinese government’s decision to cut its benchmark interest rate for mortgages by an unexpectedly wide margin. Prices reacted rather quickly to this news.

According to Argus, spot 62% iron ore for delivery to northern China was up to $135.90 a ton on May 20th. That’s an increase of 5.7% from the previous day, and the best close since May 6th. Domestic iron ore futures on the Dalian Commodity Exchange were also stronger. However, they were up by a much more modest 3.4% to end at $123.62 (827 yuan) a ton on May 20th.

The MetalMiner Insights platform provides both Dalian iron ore prices as well as a full range of AI driven metal price forecasts. 

China lowered the five-year loan prime rate by 15 basis points to 4.45% on May 20th. This represented the biggest reduction since the country revamped its interest rate mechanism in 2019. Analysts felt this new move was largely an attempt to prop up the property and construction sectors. These sectors account for about 25% of the country’s economy. In addition, Chinese premier Li Keqiang said Beijing would step up policy adjustments to return the world’s second-biggest economy to “normal growth.”

According to the same report cited earlier, some experts believe a rally around iron ore prices was in the cards. After all, such measures had clear implications for iron ore and steel demand. Moreover, initial signs suggest China was already on its way to increasing steel output after the winding down of winter pollution curbs and the removal of some of the COVID-19 restrictions.

All in all, April output rose 5.1% from the prior month to 92.78 million tons. However, it’s worth noting that this was 5.2% below April 2021’s numbers. The period from June onward will be crucial if we really want to get a sense of where Chinese iron ore and steel prices are heading.

China is Also Making Moves Regarding Supply

In the meantime, Channel News Asia reports that the Cameroonian government had inked a deal with Sinosteel Corporation Limited to mine high-grade iron ore for about US $676 million (420 billion CFA francs). It’s part of the country’s bid to find new sources for the steel-making ingredient.

Under the 20-year mining agreement, Sinosteel Cam S.A., a Cameroonian subsidiary of state-owned Chinese mining firm Sinosteel, will develop the central African nation’s Lobe iron ore mine. It’s part of China’s ongoing effort to diversify its ore supply beyond Australia (where it is currently engaged in a trade war) and Brazil.

The deal would result in 4 million tons of ore, with 60% of iron content being produced and shipped. The higher-grade iron ore would also help reduce Chinese carbon emissions from the steel-making process.

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The UK Trade Remedies Authority announced on Friday, May 20, that new measures should be put in place to “protect the UK’s aluminum extrusion industry” from dumped Chinese products.” The surprise move comes after an 11-month investigation into inconsistencies with aluminum bar imports.

The TRA made the recommendation to the organization’s current Secretary of State for International Trade, Anne-Marie Trevelyan. Spurring on the investigation were some of the UK’s few remaining aluminum extruders, particularly Norsk Hydro.

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China aluminum

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The Details Behind the Decision

After some initial research, the TRA concluded that imports of Chinese aluminum extrusions were being dumped into the UK at unfair prices. After noting this had caused significant injury to the UK’s own industry, the organization determined that a formal investigation was warranted.

In the meantime, the TRA will put some provisional measures in place. For example, importers will have to provide a bank guarantee to HMRC, the UK tax authority. This will have to cover any duty ultimately applied to imports over the next six months prior to a final determination.

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The measures go into effect on May 28. And while the level of duty is unknown, the original investigation suggested some Chinese manufacturers had been underselling their products at between 7.3% and 29.1%. This is enough to expose importers to potential claims of nearly 1/3 the goods’  value.

Aluminum Bar Imports Remain Necessary

Chinese aluminum bar products currently attract the same 6% duty level as imports from other countries. This is slightly less than the 7.5% duty applied by the EU on imports into the block. Meanwhile, rumors persist among trade buyers that the rule could apply to only those bars above 3.25″ (82.55mm) diameter. If true, this would impact only those commodities on the lower end of the cost spectrum.

While the TRA’s announcement makes no such distinction, there would be some logic in such a size cut-off. This is because UK extruders’ small presses cater to this end of the size range, and there are no domestic UK producers of larger diameter bars. As a result, companies need to import all large diameter product. In this case, additional duties would be self-defeating: protecting no one but damaging a broad consumer base in oil, gas, heavy engineering, and automotive.

Interviews with both UK importers and Chinese manufacturers make it clear this has come as a surprise to many in the industry. They also indicate that the almost-immediate application of the interim measures may do more harm than good. Specifically, it will affect those companies with orders in production or on shipment. After all, they have no means of canceling or mitigating potential costs.

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Steel prices and gas are the primary topics of conversation today. It seems that steel traders in China are seeking more buyers abroad for their finished steel products. Meanwhile, Russia is mulling cutting gas supplies to the EU. Gas prices have an enormous impact on steel prices.

China: Lockdowns at Home, Low Demand Abroad

The news comes hot on the heels of reports detailing reduced consumption in Europe and ongoing COVID-19 lockdowns throughout China. Indeed, China’s latest anti-Coronavirus measures have resulted in a 2.9% industrial output drop year on year for April. At the same time, reports indicate that retail sales were off 11.1%. Steel price offers from Taiwan and South Korea were €860 ($910) per metric ton cfr Europe, also down from €1,080 ($1,140) cfr Europe from Southern and East Asia.

As one trader told MetalMiner, “Energy costs are hitting people hard. There are more defaults on energy bills.” He added that “The whole world wants to sell to Europe.” However, with inflation hitting record highs and the war in Ukraine charging onward, the market is anything but ripe for the picking.

Another trader pointed out that summer holidays in the Northern Hemisphere (normally in June, July, and August) will also mean lower building activity and lower demand. This is sure to put further downward pressure on steel.

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U.S., China and Russia flags

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Russia: War, Sanctions, and Rubles

Uncertainty about whether or not Russia could cut gas supplies to the EU over European Commission sanctions has created volatility in prices for that hydrocarbon. Steelmakers can rely on natural gas for ironmaking in blast furnaces as well as for steelmaking in electric arc furnaces.

In 2021, the European Union imported 155 billion cubic meters of natural gas from Russia. This accounted for around 45% of total imports and close to 40% of its total gas consumption.

Another possible factor contributing to the ongoing volatility is the possibility that buyers might refuse to pay for Russian gas in rubles. In late March, Russian President Vladimir Putin issued an order demanding that “hostile countries” pay for their gas supply in their currency by opening accounts at Gazprombank. Indeed, Russia has already cut off gas supplies to Poland and Bulgaria over their refusal to comply with the demand. This immediately sparked concerns over what might happen if other countries followed suit.

The European Commission, the executive body for the European Union, has since softened its stance against buyers of Russian gas opening accounts at Gazprombank. They even stated that buyers could make payments in dollars or euros. However, the organization said nothing about operators opening a second account in ruble-based payments, which several have reportedly done.

The benchmark Dutch TTF price for the hydrocarbon commodity was €95.50 ($100) per megawatt hour on May 17, up 2.84% on the day from €92.86 ($97.93). The price achieved a high of €227.20 ($239.68) back in March.

natural gas tap

PhotocreoBednarek/Adobe Stock

Steel Prices and Gas Still Closely Intertwined

On April 29, the European Statistical Office reported that month’s outlook for inflation was 7.5% year on year in the 19 states that have adopted the euro as their currency. The organization also noted that energy was likely to have the highest annual rate in that outlook at 38%.

Of course, the EU has been trying to lessen its dependence on Russian oil and gas since the country invaded Ukraine in February. So far, their efforts include ramping up renewable energy products, lowering energy consumption, and diversifying sources.

However, many industry watchers have difficulty believing that Europe will be able to achieve that goal. “How is Europe going to back off from Russian gas?” one analyst asked. “I simply can’t see how they’re going to get away from it.”

A second source noted that it would be possible to reduce dependency on Russian gas by sourcing it from North Africa. Of course, this would require the construction of new infrastructure such as pipelines and terminals. He also said that whilst other countries have tried to diversify their gas supply, others like Germany have not. “It was comfortable for the Germans,” he said of the country’s gas transmission infrastructure.

One option for some steel plants would be to use gas produced from coking ovens to help fire blast furnaces. However, results would be inconsistent, as not every steel plant is so equipped.

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The bears are back in the metal markets, and one of their prime motivators is this year’s dismal prospects for China. A note in the FT’s Unhedged today explored the country’s “impossible trilemma” of achieving 5.5% GDP growth, reaching a stable debt-to-GDP ratio, and meeting zero-COVID initiatives. When you combine this with the reality that China demand is already sagging, you have a real recipe for disaster.

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The article also mentioned how the typical “get out of jail free card” won’t work for China. This usually consists of pouring debt into low productivity real estate and infrastructure projects. However, that will trash their debt-to-GDP growth limits. This would also be futile given the ongoing zero-COVID lockdowns, which are estimated to cover some 300 million people. After all, who is going to buy a new house if they are locked in their current one?

Destina/Adobe Stock

Dismal Numbers and Little Optimism

April’s data was, to quote the FT, “horrendous:”

  • Retail sales were down 11% from a year earlier, against an expected decline of less than 7%
  • Industrial production dropped 2.9%.
  • Manufacturing was particularly weak, with auto production falling by 41%.
  • Export growth was 4%, a screeching slowdown from 15% growth in March.
  • Real estate activity collapsed, with new construction falling by 44%.

On top of all this, credit growth has stubbornly refused to accelerate. It’s worth noting that this is despite policy moves such as last month’s reduction of banks’ reserve requirements. Meanwhile, household loans are falling, medium to long-term corporate loans are falling, and the issuance of government bonds is slowing. This all points to lower investment and activity.

China’s extremely strict zero-COVID policies are finally showing signs of reducing infection rates. And while Shanghai has announced that it will begin easing restrictions, major changes are unlikely to take place before the Presidential elections in Autumn. For that reason, we can expect consumer and corporate spending to remain cautious (and growth to remain tepid).

With China Demand Down, Exports Are Way Up

All in all, it’s no wonder then investors’ view of metal demand is pessimistic. While China’s metals production has recovered strongly from last year’s power restrictions, demand has not. As a recent report by Reuters states, metal is flowing out of the country at unprecedented rates.

Indeed, exports of all metals increased significantly this year. Even in the case of metals like copper and nickel, where China remains a net importer, the net import ratio has fallen.

  • In March, China exported 45,260 tons of primary aluminum. This represents the highest monthly total since April 2010, despite a 15% export tax.
  • Simultaneously, exports of semi-finished metal have surged. With little demand in the domestic market and most Chinese mills on short-term leads, the outbound flow rose 18% to 5.5 million tons last year. In the first quarter of this year, that figure added another 23%.
  • Refined Lead exports also increased to 98,000 tons last year and 38,000 tons in just the first three months of 2022.
  • Even Zinc exports are up. As with aluminum, this is in spite of a 15% export tax due to high energy content. In fact, export figures for the first quarter of this year were more than double what we saw through all of 2021.

These levels of surging exports are only possible because domestic primary and semi-finished prices in China are lower than in the rest of the world. Why are they lower? Because demand is lower. This may be good for consumers benefiting from supply in an otherwise constrained global market. However, it does not speak to China’s growth prospects, especially when the rest of the world is doing relatively well.

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The United Kingdom recently imposed a 35% duty on all platinum and palladium imports from Russia and Belarus. This move is part of a new package of sanctions on the two countries totaling £1.7 billion ($1.7 billion).

The Department for International Trade (DIT) and HM Treasury made the announcement on May 9. Since Russia’s late February invasion of Ukraine, the country has seen dozens of major trade penalties and tariffs. A DIT official told MetalMiner that there were no UK import tariffs at all on those metals previously.

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Platinum and palladium prices have surged along with other precious metals.

A Major Source of Platinum and Palladium

Russia is one of the world’s largest producers of platinum and palladium. Much of this supply comes from two companies: Norilsk Nickel and the Russian Platinum Group.

Reports indicate that Russia supplies about 40% of the world’s palladium and 15.52% of global platinum. The UK alone imported £1.2 billion ($1.47 billion) worth of platinum and palladium from Russia in 2021. The DIT official told MetalMiner this amounted to 14.1 metric tons and 17 metric tons of palladium.

Platinum’s primary application is in catalysis, which is used in automobile catalytic converters. It is also utilized in the production of petroleum and fuel cells. Of course, the hyper-rare element is also a major investment commodity.  Palladium is useful in catalysis as well. It also has applications in dentistry, surgical tools, and jewelry.

According to data from Trading Economics, platinum was priced at around $940 per troy ounce on May 13. On May 11, it reached a high of $994.22.

Understanding the Two Metals

The UK’s import tariff on Russian and Belarusian platinum and palladium is the country’s first action on non-ferrous metals. Meanwhile, on May 5, the HM Treasury’s Office of Financial Sanctions Implementation (OFSI) announced an asset freeze against Evraz. A global metal producer headquartered in London, Evraz has several steel making assets in Russia.

Back in March, the Department for International Trade and HM Treasury imposed a 35% import tariff on iron and steel from Russia and Belarus. This was part of a package stripping both countries of their “Most Favored Nation” status on hundreds of exports. How will these moves affect pricing? There’s no simple answer. However, we can assume that Russian metals companies will feel a significant financial pinch.

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Japan is reportedly actively considering extending financial support to the US to boost liquefied natural gas (LNG) production. Incidentally, the US is already the world’s 3rd largest exporter of LNG behind Qatar and Australia. However, the country is set to play an even bigger role in global LNG production and export as the Russian market withers in the wake of the Ukraine crisis.

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Global LNG supply and demand is shifting amid the war in Ukraine

Japan and China Turning to the US

According to a report in Nikkei, Japan has been actively trying to reduce energy dependence on Russia following Moscow’s invasion of Ukraine. Of course, doing so would necessitate finding new supplies of oil, LNG, and multiple other commodities. The report added that Tokyo is turning to Washington to figure out ways to fill those gaps.

They are hardly the first Asian country to do so either. After all, China, Japan, and South Korea are the top buyers of LNG in the world. Since the start of the invasion on February 24th, Chinese buyers have signed several contracts with US suppliers. All in all, this will account for some 7.7 million tons per year in US LNG supply.

China has already surpassed Japan as the world’s top LNG importing nation. However, due to the former country’s ongoing battle against COVID-19, China is currently looking to offload much of its LNG stock. Reports indicate that once the country tackles this latest round of the pandemic, it will return to its standard order quota.

Global LNG Supplies Shifting in the West as Well

Multiple European nations have also joined the effort to ditch Russian LNG in favor of a US-based supply. However, experts believe the US LNG export order book is already full. To meet new long-term demand, the nation will need to start investing in more plants and infrastructure immediately

This is where nations like Japan want to step in and help the US. By getting their new supplier up to speed, they hope to secure a constant flow of much needed energy. In 2021, the US exported around 75 million tons of LNG. And with the additional demand, the country may end up moving up the ranks from the third-largest exporter to #1. The extra production units in Louisiana coming online will certainly help this.

But all is not lost for Russia, it seems.

Reports are coming in that India is purchasing large volumes of Russian LNG at heavily discounted prices. Indeed, according to The Times of India, Gujarat State Petroleum Corp. and GAIL India Ltd. recently bought several LNG spot shipments from Russia at prices well below prevailing market rates. This group is likely to continue to buy even more as long as Russian supplies remain cheap, further adding to market inconsistencies.

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The UK government recently announced an asset freeze on London-headquartered metal and mining group Evraz. Authorities claim that Evraz is receiving benefits or support from the Russian government to conduct business in strategic and economic sectors. True or not, the freeze has broad implications for global steel production.

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NIZHNY TAGIL, RUSSIA – JANUARY 01, 2014: Night view of the main entrance of the plant NTMK company Evraz. NTMK plant is the main enterprise of the city of Nizhny Tagil

Evraz Investigated for “Threatening” Ukrainian Stability

HM Treasury’s Office of Financial Sanctions Implementation (OFSI) went public with the move against Evraz on Thursday, May 5. As in similar situations, the action was filed under the Sanctions and Anti-Money Laundering Act of 2018.

This specific law allows governments to freeze funds and economic resources of problematic persons, entities, or bodies. In this case, it refers to those involved in destabilizing Ukraine or undermining/threatening the country’s territorial integrity, sovereignty, or independence.

Evraz has steel making assets in Russia that include the Nizhniy Tagil (NTMK) and Western Siberia (Zapsib) plants. The OFSI also noted that the company controls coking coal mines in Raspadskaya and Yuzhkuzbassugol and an iron ore mind at Kachkanarsky.

However, the information made no mention of Evraz’s Mezhegeiugol coking coal mine in eastern Siberia or its vanadium production operations.

Evraz Denies Any Wrongdoing Despite Abramovich Relationship

Freezing the assets of companies like Evraz has played a large role in how Western countries and the EU are punishing Russia for its Feb. 24 invasion of Ukraine. Indeed, back on Mar. 10, the UK’s Financial Conduct Authority officially suspended the group’s shares on the London Stock Exchange.

The earlier move was in response to the national government placing Roman Abramovich on its list of sanctioned individuals. Well known as the owner of Chelsea Football Club, Abramovich holds the single largest stake in Evraz (28.64%).

At that time, Evraz denied any involvement in actions against Ukraine. They have since reiterated claims that they mainly produce materials for construction and infrastructure.

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North American Subsidiaries Still in the Green

Evraz NTMK poured 4.1 million metric tons of crude steel in 2018, from which it rolled about 4.6 million metric tons of finished product. The manufactured items included rails, long products, rings for mechanical engineering, and grinding balls. According to the group’s website, the plant also produced semis for tubular production.

Meanwhile, Zapsib’s product assortment includes long section steel and continuously cast and hot rolled slabs. The plant also produced continuously cast and hot rolled section billets, rails, and downstream products. In 2016, Zapsib produced 6.9 million tons of crude steel and 6.3 million metric tons of steel products.

The OFSI did note that Evraz could continue to operate with its North American subsidiaries. Allotments include “payments to or from those subsidiaries under any obligations or contracts” and “payments to or from any third party under any obligations or contracts.” It also includes the “receipt of payments made by the North American Subsidiaries for audit services.” The OFSI also added that “Evraz North America is permitted to pay for the audit services referred to in the previous sentence.”

One source noted that many Russian companies are trying to put distance between their overseas assets and their owners in Moscow. “Everyone is separating or thinking about spinning off assets abroad into separate divisions,” that analyst added. Only time will tell if their efforts will pay off.

A Major North American Producer

Evraz North America’s headquarters are in Chicago, but the subsidiary has a welded pipe mill in Oregon (Evraz Portland) and a hot end and rail mill in Colorado (Evraz Pueblo).

In total, Evraz North America has six plants spread throughout the United States and Canada. The wholly-owned subsidiary can produce up to 2.3 million metric tons per year of crude steel via electric arc furnaces at Pueblo and Regina alone. The former is located in Colorado, while the latter is situated in Saskatchewan.

Besides having hot ends, the Pueblo plant can roll long products that include rail as well as wire rod and rebar in both coils and seamless pipes. Meanwhile, the Regina plant produces line pipe from its own rolled plate products.

Other Canadian sites, such as Camrose, Calgary, and Red Deer,  produce casings and tubings for Oil Country Tubular Goods (OCTG) as well as straight- and spiral-weld line pipes. Evraz North America’s Portland plant also produces line pipe from the plate and hot coil it rolls on site

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From a technical perspective, global aluminum prices began to change structure in short time frames, which could suggest further price drops. Currently, prices are beginning to approach previously-established lows. However, a bullish trend reversal can’t occur until aluminum establishes a clear price floor.

Aluminum prices

Source: MetalMiner Insights

The Aluminum Monthly Metals Index (MMI) dropped by 8.84% month over month.                 

Global Aluminum Prices Mirror Copper, Fall Amid Lockdowns

As with copper prices, the impacts of China’s zero-COVID initiatives significantly dragged down aluminum prices. While each metal often moves on its own respective (and often idiosyncratic) fundamentals, the sheer weight of China’s economic issues is causing seismic shifts. As both the largest producer and consumer of commodities, China’s recent woes have had a strong impact across the sector.

For instance, LME aluminum and copper prices saw respective 13.69% and 4.96% month-over-month drops from March to April. This had a lot to do with the ongoing lockdowns in Shanghai, which caused manufacturing and consumer demand to contract significantly. According to the General Administration of Customs, aluminum imports into China saw a 4.6% year-over-year decline in March. All in all, it’s a trend many expect to continue as long as lockdowns and COVID-related restrictions persist.

With primary LME ingot prices falling, buyers should carefully review the best practice sourcing strategies!

EU Proposes Russian Oil Embargo

Meanwhile, the war in Ukraine ticked past its second month with countries around the world continuing to ramp up pressure on Russia. In fact, the European Commission recently proposed a sixth package of sanctions on Moscow. If implemented, they would stand as the toughest yet. As part of the package, Europe plans a full embargo on Russian oil by the end of 2022. Meanwhile, the US has had a ban on Russian oil, LNG, and coal imports since March.

Still, some member states of the EU remain divided about the severity and length of the sanctions. In many cases, this is due to their reliance on Russian energy supplies. After all, Russia is the world’s second-largest crude oil exporter (after Saudi Arabia), representing some 27% of all oil imports to the EU in 2021.

While negotiations remain ongoing, the European Commission appeared willing to adjust its proposal following pushback from certain member states. At present, the proposal would aid Hungary, Slovakia and Czech Republic with refinery upgrades. It would also allow a delayed embargo for those countries until 2024. A Russian oil transport ban for EU shipping services was also extended from one month to three.

Tight Energy Markets Could Raise Aluminum Prices

Aluminum prices are particularly sensitive to fluctuations in energy markets. In fact, on average, energy accounts for roughly one-third of input costs for the metal. This is why it is often referred to as “congealed electricity.” Therefore, aluminum price trends often mirror those of crude oil. Of course, both of these indices spiked dramatically following the Russian invasion of Ukraine in late February.

Prior to the war, Europe’s energy crisis had caused aluminum production across the continent to shutter. As such, the tightness left in the wake of Russian energy supplies will undoubtedly add upside pressure to aluminum prices. It’s also expected that this pressure will only worsen should the EU continue with its latest round of sanctions.

On the flip side, China’s lockdowns have temporarily muted the country’s demand for both oil and metals like aluminum. According to the General Administration of Customs, China’s crude oil imports fell 14% year over year in March. Of course, that relief is sure to end once the country recovers from the latest wave of COVID and restrictions lift.

For both oil and aluminum, the return of Chinese demand combined with the absence of Russian energy supplies from markets like the EU could help aluminum prices bottom out. How quickly those factors will be priced into the market, however, remains to be seen.

The MetalMiner Insights platform includes global aluminum prices, premiums, forecasts, and specific monthly busying strategies. Request a 30-minute demo of the MetalMiner Insights platform now.

Actual Metals Prices And Trends

  • As of May 1, the LME three-month aluminum price fell by 13.69% month-over-month to $3,044 per metric ton.
  • Chinese primary cash aluminum decreased by 12% to $3,135 per metric ton. Meanwhile, aluminum scrap declined by 12.12% to $2,235 per metric ton. Finally, Chinese aluminum billet fell by 7.85% to $3,308 per metric ton.
  • Simultaneously, European 1050 aluminum sheet dropped by 13.64% to $4,473 per metric ton.
  • Indian primary cash rose by 9.87% to $3.38 per kilogram.

 

There’s something afoot on the rare earths front in China. Specifically, the country recently decided that it wants to tighten its export control laws. The regulation passed about two years ago to stop importing countries from diverting “Chinese products for non-intended use.” In most cases, the “products” refer to rare earth elements, of which China is the world’s biggest producer.

The announcement comes just a few days after news that an American company may have found the largest reserves of rare earth elements in the US. In fact, US-China relations experts are still trying to connect the “geo-political” dots around China’s latest move and its implications.

China currently dominates the global rare earth elements market.

Why Rare Earth Metals and Why Now?

A report from nikkei.com stated that going forward, exporters of Chinese products with potential military applications may have to provide documentation as to their intended use. Apparently, the ultimate goal is to “halt the militarization of sensitive tech.”

The article also reported “concerns” that the regulations would be arbitrarily enforced against countries that have poor diplomatic relations with Beijing. Officials did not name the US directly, of course. Still, it’s no secret that trade relations between the US and China have not been healthy since the Trump administration.

In December of 2020, China finally joined many other countries in passing an Export Control Law. The crux of the legislation gave Beijing control over strategic products and even advanced technology items. The move was widely seen as a response to US restrictions on Chinese IT firms like Huawei Technologies Co.

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Reasons for the Further Tightening of Export Control

According to reports, China’s Ministry of Commerce has published its new export proposal with the intent of soliciting public comment. The regulations are also in line with the “total national security outlook” policy of President Xi Jinping. This includes 11 total areas of security coverage: politics, land, military, economy, culture, society, science and technology, information, ecology, resources, and nuclear.

If and when the proposed regulation becomes law, it will empower the Chinese Government to carry out a “risk assessment” of the country or region receiving the exported products. This would factor in both national security interests as well as foreign policy needs. Export licenses for “high-risk destinations” will also be subjected to even stricter screenings.

The Nikkei report went on to say that rare earth metals could be subject to export controls “depending on how authorities interpret the regulations.” Many of these materials feature in the manufacture of high-performance magnets. However, those importers who alter the “end use”  without permission may find themselves on a regulated list. Repeat offenders may end up subjected to embargoes or even a revocation of their export license.

Risk Assessment and the War in Ukraine

Ostensibly, the new law seeks to prevent the export of dangerous products to terrorist outfits or rogue nations. Still, how China plans to assess the risk level of export partners is not yet clear. Currently, China forbids the transfer of regulated products to third parties without the approval of the government. After Russia invaded Ukraine, China had got some flak for allowing the export of chips used in Russian missiles and spy satellites. There were also reports of US chips being used in missiles after being clandestinely exported via Bulgaria.

There’s a major semiconductor shortage in the world today, and the Ukraine conflict has only intensified US-China trade tensions. According to this report, US officials warned they would impose strict export controls on China should the country try to send semiconductors containing US technology to Ukraine. For this reason, the purported move by China was seen as an illegal attempt to help Russia cope with global sanctions.

Massive mines like this are found in several areas of China

Xinjiang Rare Metals National Mine Park

The Rare Earth Metals Race

A wide range of industries rely on rare earth minerals, including automobiles, transportation, power generation, and defense. In recent decades, US investment in its homegrown chip industry has decreased. This was largely because Japan, Taiwan, South Korea, and China were making them far cheaper. Now, the US has decided to halt this reliance, especially when it comes to China.

That’s why the initial discovery report from Wyoming comes as such a happy surprise. According to the data, the rocks there have an unusually high content of several “rare earth” elements: Neodymium, Dysprosium, Praseodymium, and Terbium. All of these are essential for making the magnets used in electric vehicle motors and wind turbines.

American Rare Earths, the company conducting the exploration and analyses, also has holdings in Arizona and Nevada. Combined, all of these could ease US dependence on foreign sources of these key metals. Indeed, China controls roughly 87% of the magnets market, a fact that many US officials are desperate to change.

The US has its Own Ideas

US Senators Tom Cotton & Mark Kelly recently introduced legislation that would establish a rare earth stockpile via the Department of Defense. It would also require defense contractors to stop buying rare earths from China by 2026. This follows an earlier bill introduced by senators Marco Rubio and Cindy Hyde-Smith. The latter’s goal was to provide Department of Energy funding that could support domestic manufacturing of finished rare earth products.

Clearly, for the US, the supply-chain mess, the pandemic, and the Ukraine conflict have served to highlight the importance of rare earth independence. Now, we need only wait to hear the final word on China’s counter-move.

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Following a strongly inflationary metal environment in Q1, Q2 2022 is looking like a whole different ballgame. Indeed, it’s no secret that the global economy is currently facing a number of major challenges. Alone, none of these would be enough to derail us from last year’s strong rebound. When added together, however, they’re helping to shape a far-from-rosy outlook for the 2022 metals forecast.

The “Winds” of Change?

A recent Capital Economics note to clients phrases it particularly well, stating that “all three of the world’s major economic blocs are now facing significant headwinds.” In the US, the storm stems from an increasingly-hawkish Federal Reserve. Meanwhile, the euro-zone faces mounting pressure from the recent massive squeeze in real incomes which threatens to push the region into recession.

In China, the government’s immediate challenge has been quashing the continuing Omicron outbreak. Unfortunately, the country’s zero-COVID initiative has so far done little to affect the spread of the virus. What it has done is tightened restrictions across some of the country’s biggest and most economically-important cities.

The Omicron variant is by far the biggest wave of infections to hit China, a country still woefully under-protected in terms of vaccines. According to CE, the areas impacted account for some 40% of China’s GDP and 80% of China’s exports.

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China Activity in Areas with Local Outbreaks (%)

A look at how the metals forecast might be impacted by China's COVID situation.

COVID is Just the Start of China’s Worries

Even without the lockdowns, China’s outlook is challenging to say the least. Its construction sector is struggling under extreme debt. Meanwhile, fewer young buyers than ever before see any benefit to investing in the property market. To make matters worse, exports are struggling as consumption habits adjust in overseas markets.

CE points to Amazon’s Q1 results to illustrate a return to pre-COVID demand levels as services rebound. But according to Reuters, China’s factory activity slumped at the fastest pace in two years this past March. In fact, the Caixin purchasing manager’s index slid to 48.1, its lowest reading since the first pandemic wave in early 2020. The official PMI also dipped into contraction territory, slipping below 50 for the first time this year.

New orders are falling particularly fast, reflecting both stalled domestic demand and the disruption to overseas markets. Of course, most of these disruptions result from Russia’s “special military operation” in Ukraine. Regardless, if China’s economic growth slows and industrial and construction demand weakens, the metals forecast from the world’s largest consumer will weaken as well.

Not surprisingly, metals prices have already started slipping. After reaching a high above $10,600/mt last month, copper prices today fell below $9,500. There’s no doubt about it: the bears have returned to short the market. Aluminum has followed copper’s lead despite a March surge caused by the EU’s rejection of Russian supplies. China’s woes are a factor here, too, as the country has been ramping up primary metal output. As a result, semis exports have been rising strongly.

Weighing the Metals Forecast Against Demand

Demand is the prevailing narrative in today’s metals market. As activity in all three regions continues to slow, demand for industrial metals is likely to ease. Still, whether an improvement in global logistics delays remains a leading or lagging indicator is debatable. Either way, there’s no doubt they are gradually becoming less of an issue for metal supply. The bears may be here, but the market has yet to turn their way. Q2 and Q3 will have a lot to say in that discussion.

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