Commentary

A 2014 Bureau of Labor Statistics report showed that companies in the top quartile of inventory turnover tend to have no more than three to four days of raw materials on hand. For metals suppliers this could lead to shortages and disrupt customers’ supply chains.

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Supply chain financing, though, can help buyers and sellers work to manage supply and cost issues. The role of supply chain finance is to optimize both the availability and cost of capital within a given supply chain by aggregating, packaging, and utilizing information generated during supply chain activities and matching this information with the physical control of goods.

If you’re buying metals for product manufacturing, for example, it can be beneficial to have the cash-flow flexibility of supply chain financing, especially if you’re a smaller manufacturer. In supply chain finance, an agreement is made between the buyer and supplier to use credit facilities or other financial instruments to bring down costs and risks for both parties.

Buyers can utilize “buy now, pay later” open account transactions which can be counted as regular payments for a continuing flow of goods rather than specific transactions or set prices and quantities. Buyers can extend payment terms with their suppliers. Suppliers, such as metals service centers, can use their credit ratings to bring in customers who, without support from banks, might otherwise not be able to do business with them. Other third-party financiers can also join in the agreements and assist either side with loans or other financing instruments.

In aerospace and defense, this could mean optimizing purchasing across a global supply chain. SCF provider Taulia recently announced a partnership with Exostar, which provides cloud-based solutions to the sector, as well as to the life sciences and health care sectors. There are more than 100,000 aerospace and defense corporate buyers using Exostar’s solutions that now have access to Taulia’s supply chain finance offerings. Taulia’s SaaS product is being integrated directly into the Exostar interface so if you’re a small manufacturer providing electronics or metal parts, you could have the same buying advantages of a larger organization.
Earlier last year, TradeRocket and Hitachi Capital America entered a similar agreement. TradeRocket provided Hitachi Capital with a pool of mid-market buyers (companies with annual revenues of $25 million to $500 million) who, once underwritten, would be able to use TradeRocket’s early pay invoice option to its entire supplier network.

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Giving buyers payment flexibility and suppliers access to new markets is a win-win for both bottom lines.

As the new year dawns, we turn our eyes toward the metal markets of 2017. Will the bull run of 2016 continue? What will be the standout performer of the metals we track? Will New Coke finally make a comeback as Even Newer Coke? Only to re-reintroduce Coke Classic in all its aluminum-encased glory? We have predictions. Lots of them.

Steel on Wheels

That’s right, the North American steel market is picking up steam and chugging toward expanded production and renewed profitability for many of the companies we track. Contributor James May said this week that flat products will enjoy higher demand while hot-rolled coil capacity will expand thanks to a combination of new capacity going online (Big River Steel‘s plant is set to open) and the trade policies of the incoming Trump Administration.

Iron Ore Overseas

China consumes over 70% of the world’s seaborne iron ore and a strong year for the Chinese economy bolstered the steelmaking raw material from from $40 per metric ton to $70/mt in global markets last year, an increase that helped re-energize the bottom lines of mining majors Rio Tinto Group, Vale SA, BHP Billiton and Fortescue Metals Group.

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This week, Sohrab Darabshaw pointed out that that was cold comfort to smaller miners in India who are still hamstrung by high export taxes and can’t get their ore into China or other lucrative world markets. That could change soon, but MetalMiner Co-Founder Stuart Burns was even more cautious, reminding us that physical iron ore prices were influenced by a rampant futures market last year.

Source: Adobe Stock/Geargodz

“The interplay of the futures market, physical demand from steel mills, and seaborne iron ore supply has too many variables to predict 2017 and ’18 with any certainty,” he said.

Trumping Trade

While some of the markets are still murky, one thing we all agreed on this week was, once Donald Trump is installed as President of the United States, 2017 certainly won’t be boring when it comes to international trade. Read more

After more than four years of languishing, some hope’s been rekindled in India’s iron ore mining sector.

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Ore production jumped 22% between April and October, according to figures released by the government. Iron ore production stood at 100 million metric tons during the resurgence, against 81 mmt during the same April to October period a year ago. What’s brought even more cheer is the news that exports, too, jumped 9 times their previous level, to 9 mmt from last April to September, as compared to 1 mmt, the same period last year.

Export Taxes

With a steep price hike in global markets aided by protectionist measures for the domestic steel industry, will India see a resurgence in iron ore exports? Not so fast.

India has plentiful iron ore stockpiled but taxes are holding up exports. Source: Adobe Stock/nikitos77.

The protectionist measures imposed by India’s government previously included an export duty tax of 30% on high-grade iron ore. Many within the mining sector are of the opinion that the export tax must go, or at the very least be reduced, to boost exports. Read more

By anyone’s reckoning, iron ore and coking coal had a stellar year in 2016. Driven by infrastructure investment and a robust construction market, Chinese imports of our iron ore could top 1 billion metric tons for the first time in 2016. Prices more than doubled in the space of 12 months and the supply-demand situation seemed to be largely in balance for much of the year.

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After topping $80 per mt in early December, prices eased back a little toward the end of the year prompting many to ask “have we seen the peak in iron ore prices?” Mills typically cut output during the quieter winter months when construction demand slows. Many steel mills have already curbed output due to chronic smog alerts across northern China.

Chinese Demand

Seasonally, it would not be unusual if iron ore prices remained subdued up to the Chinese New Year and then picked up in preparation for the peak production months of late spring and summer. But, while Chinese demand defied many expectations of a slowdown in 2016, the recent softening of both iron ore and coking coal raw material prices, and the price of some finished steel products over the last week or 10 days, has lent support to some analysts’ predictions that we could be seeing markedly lower Iron ore prices throughout this year and next. Read more

There are many in the business community who share a sense of anxiety as to what trade policies the new administration of President-elect Donald Trump will introduce in the year ahead but, if it’s any consolation, the U.S. is not alone in pandering to populist calls for limits on free trade.

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Here in Europe there is a quieter but no less disturbing war being fought between the European Union Commission and the European Parliament and the E.U. member states. Historically, the European Commission handled trade negotiations on behalf of the single market, but the 2009 Lisbon Treaty, intended to make the EU more efficient and transparent, also gave all the EU’s 38 National and regional parliaments essentially the right of veto on any new trade accord.

Anyone Can Veto… Anything

As Carnegie Europe in a recent post observed the sheer complexity of trade deals, which cover many topics that are not included within the European Commission’s powers, means that ratification is becoming a de facto requirement of any new trade deal. As politics becomes more populist in the E.U., as in the U.S., an array of interest groups can challenge any deal on the grounds of environmental, health, cultural, employment concerns, or any combination of the above. Read more

Even in today’s price competitive global market place there are a few industries in which the United Kingdowm can be said to punch above its weight. Automotive is one, it accounts for 10% of the UK’s trade in goods, and over 50% of UK manufactured cars go out for export.

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Defense is another. The U.K. is the world’s fourth-largest arms exporter after the US, Russia and China. But maybe the crown jewel of U.K. manufacturing is the aerospace sector. It doesn’t come much more value-add than aerospace and the U.K. ranks fourth in the world behind the US, Germany and France for export values. However, France’s numbers are distorted by the fact Airbus aircraft are receive their final assembly in Toulouse. So, although 75% of the aircraft is imported as major components — fuselage, wings, tail, engines, etc. — the total value of the aircraft is reflected in France’s export earnings even though most isn’t made there.

And therein lies the problem for the U.K. post-Brexit. The wolves are gathering around the gates slavering at the prospect that the majority of the citizens’ decision to leave the E.U. means the position of U.K. aerospace manufacturers in the Airbus supply chain is up for grabs.

According to the Financial Times, Airbus will face political pressure to bring jobs back to France, Germany and Spain as a result of the U.K.’s decision to leave the single market. BAE Systems has played a leading role in the development of wing technology, designing and manufacturing virtually the entire wing for Airbus’ super jumbo jet, the A380. But there has been a constant move by Germany to get as much wing work out of the U.K. because it is one of the most lucrative parts of the supply chain. The bottom skins of the wing for the new A350 went to Spain and Germany, both keen to secure further work as new models come up for bidding.

Last year, the U.K. aerospace sector grew by 6.5% to £31 billion ($38 billion) 87% of which was exported. The industry fears a clampdown on free movement of labor and political influence over trade regulations could combine to raise the cost of business for U.K. companies in the sector.

Although aircraft and their parts are exempt from tariffs under World Trade Organization rules, the FT reports there is a fear the competitors could encourage their governments to find loopholes during exit negotiations that would create barriers or raise the cost of business for U.K. companies. For Rolls-Royce, the U.K.’s premier aero-engine manufacturer, the major concern is that a block on free movement of labor would inhibit the company’s ability to move workers between Europe and the U.K. at short notice as production issues demand.

About a quarter of Rolls-Royce’s workforce is based in the E.U. outside the U.K. Despite the U.K.’s reputation for engineering excellence, the country is desperately short of engineers. As a result, the manufacturing sector has been at the forefront of lobbying government for exemptions to a blanket block on immigration.

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The future prosperity of U.K. manufacturing was probably not at the forefront of voters’ minds when they opted to leave the E.U., but if it is found that highly paid jobs are lost as a result of the U.K.’s exit from the single market, economic issues me yet come back to become a focal point in any post-Brexit analysis.

If there is one area in which 2017 is going to be a momentous year, it is in trade.

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The incoming Trump administration campaigned on and has, since winning the election, robustly promoted an anti-free trade platform saying the North American Free Trade Agreement is “the worst trade deal maybe ever signed anywhere,” bullying GM, Ford Motor Company and various other multinationals into rethinking strategic investments planned for Mexico and forcing them to be shelved or amended. Read more

You probably wouldn’t be the first to nominate the Daily Mail or its owner, the Daily Mail and General Trust, for an award for cutting edge journalism but a recent article from Daily Mail Australia certainly grabs your attention.

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It underlines why China has such an intractable problem with pollution. It also suggests how Chinese steel mills are managing to have such a disruptive effect on global steel prices apparently bereft as they are of the legislation imposed on the rest of the world.

Unlicensed Steel Mills

In a series of graphic photographs (please click through to the link above, MetalMiner cannot republish the photos due to copyright) the paper illustrates the appalling state of many private steel plants on the fringes of the Chinese steelmaking industry. Certainly, the industry is dominated by major state enterprises, but it is also riddled with hundreds of smaller steel plants operating almost entirely outside the law.

Paying little more than bribes to buy off investigating officials, these mills not only ignore worker’s rights and safety but compliance with air and soil pollution legislation is non-existent. When you pay peanuts, ignore environmental requirements (and hence costs) and operate on the fringe the dividing line between profit and loss is blurred. These mills not only pollute the environment not just to the detriment of their workers and the local community, they also, when it suits them, dump excess capacity both domestically and for export.

The photos, taken by photojournalist Kevin Frayer in an arid region in the country’s north called Inner Mongolia show images of steel mills we have not seen in the west since the days of Charles Dickens.

Not surprisingly, after several years of a “war on pollution” Beijing was again suffering from a yellow smog alert recently with hundreds of flights cancelled and highways closed across northern China as average concentrations of small breathable particles known as PM 2.5 soared about 500 micrograms per cubic meter in Beijing and surrounding regions, according to Reuters.

Shadow Steel Industry

Although Beijing has taken strenuous measures to control emissions with so much energy produced from coal and so many industries still failing to meet environmental standards, it’s no surprise progress is slow. While China is the world’s biggest polluter it is also, to its credit, a global leader in establishing renewable energy sources such as wind and solar power. Yet, as these photographs show, a great deal more needs to be done. Until Beijing cleans up the production side of the equation, no amount of new renewable energy technology is going to solve the problem.

Welcome to the first MetalMIner Week-in-Review of 2017!

This week, trade issues came to the forefront as President-elect Donald Trump, now just two weeks from his inauguration, named veteran trade lawyer and former Reagan administration official Robert Lighthizer as his U.S. Trade Representative.

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While nobody could accuse China of getting a free ride from the current administration, I think it’s safe to say the U.S. Trade Rep’s office website won’t have an endorsement of the Trans-Pacific Partnership on it come January 20th.

Michigan or Michoacan?

Who gets hurt the most by a bunch of fair trade hardliners coming into office with Trump? It might look like Mexico right now — Ford Motor Company just pulled up stakes on a new facility there and instead invested in Michigan — but it’s actually China, as the U.S. trade deficit with them is our largest and the director of Trump’s National Trade Council, Peter Navarro, is a longtime critic of the way the People’s Republic trades with the U.S. and the entire world. Expect Navarro, Lighthizer and Commerce Secretary nominee Wilbur Ross to set their sights squarely on China’s trade with the U.S.

Also, China says it’s really serious about cleaning up its dirty steel mills and smelters this time.

From Russia with Hard-to-Find Oil

President-elect Trump has had mostly good things to say about Russia and he’s even boasted that he’d “get along well” with Russian Federation President Vladimir Putin, despite intelligence community accusations that Russia “hacked” the recent election by providing information from the Democratic National Committee and Democratic Nominee Hillary Clinton’s campaign manager, John Podesta, to organizations such as Wikileaks for wide distribution and dissemination. Trump may get tested early on that Russian reset, anyway, because Russia is already reclassifying its biggest shale oil find to avoid sanctions placed on the federation when it annexed Crimea.

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If Russia can avoid sanctions on its oil exports what will that say about any other country thumbing its nose at international law? Interesting trade times coming up.

To begin 2017, aluminum prices inched higher with the U.S. dollar retreating and traders awaiting clarity on the market.

According to a recent report from the Economic Calendar, downward pressure on aluminum has been the story since December, but over the course of 2016 the metal saw a 13% increase. The reason? falling supply with the closure of capacity while demand grew as the result of China’s infrastructure initiatives.

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Donald Levit, writing for the Economic Calendar, said: “Even though it is typical for aluminum prices to retreat in late fall and winter, prices held steady through mid-December after Donald Trump won the U.S. presidential election in November. Trump made a campaign promise to move to further stimulate the U.S. economy, and that stimulus could potentially include infrastructure spending. That would boost aluminum demand.”

What does 2017 have in store for aluminum prices? Volatility could be the word with traders attempting to assess how the market will evolve as the year progresses.

The Auto Industry and Aluminum

Our own Raul de Frutos echoed the sentiments of aluminum’s struggles in December after a 2016 of growth. But what does the auto industry have to do with it? Raul writes:

“The auto industry is a key driver of aluminum demand. Auto sales in US and China (the world’s biggest car market) finished the year on a strong note. Total vehicle sales in the U.S. hit an 11-year high in December, aided by a fourth-quarter surge in demand that exceeded expectations. In China, car sales hit an all-time record in November, up 17.1% year-on-year.”

How will aluminum and base metals fare in 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: