CommentaryMarket Analysis

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Three-month zinc on the London Metal Exchange was up 1.3% at $3,426 a metric ton in official midday trading on Monday, having earlier touched a peak of $3,440 a ton — its highest since August 2007, Reuters reports.

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Like all base metals, zinc was been driven higher by a weak dollar — but that is far from the only driver pushing it to outperform all other base metals so far this year.

Inventories Continue to Fall

LME zinc inventories have fallen for 13 consecutive weeks to their lowest since October 2008. There was a further drop of 10,000 tons to 116,675 tons just late last week.

Meanwhile, Shanghai stocks have declined more than half over the past year, Reuters says, as supply constraints persist. As a result, Treatment and Refining (TC/RC) charges for concentrates and refined metal have fallen as refiners fight for cargoes to process.

A Market in Deficit

The reason physical metal is in short supply is no secret.

The market is in deficit, by 504,000 tons during January to October 2017, compared with a deficit of 202,000 tons recorded in the whole of the previous year, the World Bureau of Metal Statistics reports. Buyers had hoped 500,000 tons of capacity at Glencore’s Lady Loretta mine in Australia would be back onstream by now, having been closed due to low prices in 2015. Although the company promised to restart production in the first half of 2018, so far there have been no deliveries.

Higher prices have encouraged tailings at the previously closed Century mine in Australia to be opened up for processing; but again, significant deliveries are still pending.

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Zinc Could Rise Even More

Meanwhile, speculative positions have grown, betting on further price rises.

That is not without some basis, as robust demand has been constrained by tight supply and with Chinese smelters hit by Beijing’s environmental campaign to close energy-intensive manufacturing activities during the winter heating season. Reuters quotes ING analyst Warren Patterson, who said if economic and manufacturing data remain strong, there is potential for further upside.

The above headline is true, assuming the U.S.’s avowed aim is the health and future of the American steel industry and its workers.

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No one would dispute the idea that the world has too much steelmaking capacity. Many emerging markets and all mature markets are in agreement that excess steelmaking capacity depresses global prices and begats a beggar-thy-neighbor attitude to world trade.

Even taking the elephant in the room out of the assessment, The Economist estimates, by excluding China, global capacity use fell from 86% in 2004 to 69% in 2016, underlining how severe and widespread the problem is.

Source: The Economist

Recent cutbacks in China, recent research from Bank of America Merrill Lynch suggests, mean it is on track to use a full 88% of its capacity in 2018. Steel prices have rallied, mostly due to broad-based rising global growth.

While there are no guarantees that older, less environmentally friendly steel plants closed in the last 12 months will not be replaced by new, more efficient and less-polluting steel plants in the future, recent directives from Beijing suggest it is applying pressure to state governments to limit the permitting of new steel mills.

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Sanjeev Gupta, the industrial buyer of distressed steel, aluminum and coal assets (to name just a few of the areas he has expanded into in recent years), has so far managed an uncanny knack of good timing.

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Buying steel assets just before the global steel market finally lifted even Europe out of the doldrums, and now aluminum. To be fair, Gupta is not new to aluminum.

Gupta’s Liberty Group bought the Lochaber aluminum smelter and hydro-electric power plant from Rio Tinto in 2016 in a $410 million deal when Rio was desperate to shed “non-core” assets and raise cash.

Since then, the aluminum price has risen some 30%. Now, with aluminum on a roll, Gupta is again picking over the carcass of Rio’s aluminum assets, this time putting in a $500 million offer for Europe’s biggest refinery: the Dunkerque aluminum smelter.

Lochaber was only 47,000 tons capacity, but Dunkerque is on an altogether different scale, producing 280,000 tons a year. That disparity makes it a steal with respect to purchase price per ton of capacity compared to Lochaber, and is said to be profitable at current aluminum prices.

For most aluminum producers — unless they are niche, high-purity players or have integrated downstream activities — tend to have larger concerns leveraging economies of scale and sometimes integrating upstream into alumina, and even bauxite mining, to secure their supply chains. It is rumored Gupta may have something of the same objective. He is apparently in talks with Rio for more of its aluminum assets, according to the Financial Times. Rio is also looking to sell a 205,000-ton-per-year Isal aluminum smelter near Reykjavik, Iceland, and its Pacific Aluminum business, which analysts say could fetch more than $2 billion, with Gupta rumored to be interested.

Quite how he has managed to fund his rapid acquisition spree in recent years is the subject of some speculation. With purchases of generally distressed assets in shipping, recycling, banking, commodities trading and energy, there does not appear to be an obvious theme to his empire building beyond being broadly metals-related and presumably cheap.

Turning distressed assets around, though, is a hugely intensive and time-consuming process — and not without considerable risk, as many fail.

Yet so far, Gupta’s vehicles, Liberty Group and Simec under the GFG Alliance holding company, have apparently done rather well.

The success of Dunkerque will be contingent on the French nuclear generator EDF continuing to supply electricity at viable rates. That is probably, for now, a given, since the French apparently are more concerned about maintaining employment of the 600 workers at the plant.

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Amongst a plethora of news, comment and opinion, it is often like struggling through a jungle when trying to get clarity on the commodities landscape. Sometimes, there is almost too much information.

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So, an analysis in the Financial Times entitled “Five things to watch as Brent crude oil nears $70” makes a refreshingly simplified but no less comprehensive summary of the key issues currently driving the oil price.

The crude oil price rise has been relentlessly rising for the last 3-4 months and while plenty of opinion has been espoused — in these columns too, I should add — about the moderating effect of U.S. shale oil on global supply (and hence, prices), the reality is so far the impact has been minimal. Prices have continued to show stubborn resistance to any such moderation.

Iran has certainly been a factor. Opinions differ as to how much impact unrest in the region has contributed to price rises. However, as the third-largest oil producer in OPEC, contributing to some 4% of global supply, civil unrest was a reminder that nothing can be taken for granted.

In practice, protests had no impact on oil output. The street protests have now subsided, but Iran remains a source of tension in the region, with an antagonistic stance towards Saudi Arabia with respect to its military intervention in Yemen providing the potential for a flare-up. Oil output in the region generally has suffered some setbacks, with output in Kurdistan dropping after Baghdad took back control of disputed oilfields in October.

Output elsewhere has remained restrained in those countries participating in the Saudi-Russian led coalition to reduce inventories, but question marks remain as to how well they will stick to the deal as the oil price remains firm in 2018. Many may believe the heavy lifting is done and treasuries now deserve replenishing.

Not so fortunate to have a choice is Venezuela, which is quietly imploding.

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President Trump is not unused to controversy — some say he even courts it.

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So, a recent proposal following an executive order signed last April to widen energy exploration should come as no surprise.

The draft Five-year Outer Continental Shelf Oil and Gas Leasing Program has been enthusiastically welcomed by the oil and gas industry but vociferously opposed by a cross-party coalition of governors, lawmakers, environmental groups and the military.

The proposal is to open up 25 out of 26 regions of the outer continental shelf in which oil and gas exploration had been banned by former President Barack Obama near the end of his term. The ban blocked drilling about 94% of the outer continental shelf, but the Department of the Interior said the new proposal would open up 25/26 regions on the Eastern seaboard, the Californian coast, the Gulf of Mexico and in the Arctic.

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Gold has defied interest rate rises and record equity markets to rally to its highest level in more than three months, the Financial Times reported this week.

Rising more than 6% since early December to over $1,300/ounce — its highest level, the paper reports, since September 2015.

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Gold is normally considered a safe-haven asset and a store of wealth in times of financial stress and uncertainty. So, why the surge in demand?

Performance of the U.S. Dollar

The U.S. and Europe are both expanding and emerging market growth is set to top 5% this year. One theory is the weakness of the U.S. dollar — as the dollar falls, all commodities priced in the currency become relatively cheaper and therefore more attractive to buyers in other currencies.

The dollar has been the worst performer of the G10 currencies in 2017, falling some 10% over the year. Investors also have expectations of higher inflation in the U.S. due to President Donald Trump’s tax reforms and a rising oil price, which often stokes inflation is seen by some as a risk. But while the dollar is attributed with the majority of the rise in gold, it may not be the whole story.

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After hitting a low of below $43/barrel in mid-2017, the oil price has risen inexorably to its highest level since 2015, according to the Financial Times. Rising some 35% since July, Brent crude hit over $67/barrel as hedge funds heap long positions despite the market, by most accounts, still being in surplus.

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Source: MacroTrends.com

OPEC’s alliance with Russia and a few other non-OPEC producers has certainly restricted supply (and the market is tighter as a result). However, the U.S. Energy Information Administration forecast in December that U.S. oil production would rise by 780,000 barrels a day in 2018, as prices continue to increase.

But for the first time in several years, the talk is more about demand and geopolitical risk than about excess supply.

Venezuela is rapidly imploding with output from the world’s second largest proven oil reserves failing steadily. Iranian unrest has added further anxiety for fear the protests could continue and possibly begin to impact output. Meanwhile, one-off crises like cracks found in a major North Sea pipeline and a fire in Austria have added a sense of vulnerability to the market that wasn’t there just a few months ago.

“Geopolitical risks are clearly back on the crude oil agenda after having been absent almost entirely since the oil market ran into a surplus in the second half of 2014,” the FT quotes Bjarne Schieldrop, chief commodities analyst at SEB.

Meanwhile, though, the elephant in the room is stirring.

U.S. shale production is on the rise and U.S. exports are also increasing sharply, offering the potential to undermine global markets. Platts estimates in its December 2017 Insight report U.S. crude exports could average 2 million b/d by 2019, having already nearly breached this figure in late September. The capacity is in place to export 3 million b/d now and will be closer to 4 million b/d during 2018, Platts reports.

Source Platts

Nor is rising supply from U.S. shale the only source of supply-side excess.

New projects in Brazil and Canada could add as much as rising U.S. exports matching rising global demand and leaving the market at best in a balanced state. For now, the bulls have the market by the horns — to muddle my metaphors — but 2018 will see a fascinating tussle between OPEC-led cutbacks and growing supply from the Americas.

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On the plus side, strong global growth, both among mature and emerging markets, is lifting demand. For the time being, the bulls are in the ascendancy and it would be a brave wager to bet against them in the short term.

Everyone loves a forecast, a prediction, even a few ideas on what the future holds, and we become particularly obsessed with such ideas at the start of a new year.

So, we thought it would be fun to review a few sources’ suggestions on what 2018 may hold, some as specific predictions like those in the Financial Times, and some as possible standout black swan events that could catch us off guard, such as those in The Telegraph newspaper.

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Firstly, some of the Financial Times’s suggestions. They came up with 20 of them, but many are political and somewhat niche for our readership, like whether or not Britain’s Prime Minister Theresa May still be in power by the end of 2018. It’s a topic only the Brits are obsessed with and as it’s not exactly going to roil international markets one way or the other, we will ignore it here, as will non metal-market issues, like whether the AT&T-Time Warner merger will go through without big changes to both.

However, of more interest are questions like “Will Trump trigger a trade war with China?” Yes, in the FT’s opinion. The paper believes Trump will deliver on his protectionist campaign rhetoric and take punitive actions against China in 2018, resulting in China either imposing retaliatory measures or taking America to the World Trade Organization (WTO). (While on the Trump train of thought, another ditty from the FT is “Will the president will be impeached in 2018?” — or, at least, whether or not proceedings will be brought against him by the end of the year.)

Back to China, the driver for metal markets will be Chinese demand and Chinese GDP growth. At least officially, growth will continue to headline at 6.5% throughout 2018, the FT believes, although it clearly does not believe the official figures and makes the point real growth will be somewhat lower. Emerging market growth overall is expected to rise above 5% through 2018 despite the U.S. Federal Reserve increasing rates, which could spark taper tantrum spoilers (as in 2013). Even so, emerging market growth is expected to remain robust, aided by ongoing strong growth in the U.S. and Europe.

Political Turmoil Shakes Things Up Worldwide

Politically, 2018 could be an interesting year.

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Now that the New Year has begun, we’re getting ever closer (hopefully) to the Commerce Department’s final recommendations on the Section 232 investigation.

Today we continue our podcast series that we’re calling “Manufacturing Trade Policy Confidential,” in which we turn our focus to the aluminum industry. Our guest is Heidi Brock, the president and CEO of the Aluminum Association, whom we spoke with just before the winter holidays. She works tirelessly on behalf of the association’s members, which span the entire value chain. Heidi does find moments, however, to take a step back and see the bigger picture.

Recently, she got to see the newly commissioned USS Gabrielle Giffords, a warship named after the former Arizona congresswoman, and it left her with a sense of awe. “I just can’t tell you what an amazing experience it was,” she said.

To hear more on what a strong domestic aluminum sector has to do with national security, and how the aluminum sector views other hot trade issues of the moment and why, listen in to Lisa Reisman’s conversation with Heidi Brock.

Here’s Heidi in front of the U.S. Navy littoral combat ship USS Gabrielle Giffords:

Courtesy of Heidi Brock

For an additional sense of scale, here’s an “aerial view of the ship during its launch sequence at the Austal USA shipyard, Mobile, Alabama,” according to Wikipedia, from a photo provided by the U.S. Navy:

Source: U.S. Navy/Wikipedia

Manufacturing Trade Policy Confidential: Background

With everything that’s been happening on the international trade policy front over the past year, we wanted to give metal buying organizations more insight into the issues they may not be reading or hearing enough about — or at all — in the mainstream B2C media.

What better way to do so than go straight to the source — or sources — and interview some key movers and shakers on the manufacturing and policy fronts? So we’ve started a brand-new series called “Manufacturing Trade Policy Confidential.”

If you’ve visited MetalMiner’s digital pages over the past several months, you’re no stranger to the phrase “Section 232” — shorthand for the U.S. Department of Commerce investigation into whether certain steel imports constitute a national security risk, under the namesake section of the U.S. Trade Expansion Act of 1962.

The outcome of the investigation (findings from which were slated to come down last summer but have been delayed) could have significant effects on upstream and downstream manufacturing organizations, ranging from metal producers to buying organizations – even the mom-and-pops.

But Section 232 is only one small part. Trade circumvention, China’s non-market economy status, domestic uncertainty amidst proposed tax plans and many other issues have pushed us to start this new podcast series.

We’ll be publishing several more interviews in the coming weeks and months – stay tuned!

Listen to more episodes and follow the MetalMiner Podcast on SoundCloud.

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Copper is on a tear.

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Copper rose to its highest point in nearly four years last week following further curbs on domestic production in China, closing at new year-to-date high for 2017. LME and Comex copper continued its longest bull run in more than a year, after closing at its highest level since January 2014 on Dec. 22.

Analysts suggest prices are being lifted by hopes that a stronger U.S. economy under a lighter tax regime will fuel demand for the metal. Maybe of more importance is the largest copper producer in China, Jiangxi Copper, was rumored to have been ordered on Monday to halt output for at least a week before a further assessment based on local pollution levels. The effect has been to boost support for Shanghai copper, which rose to a 2-month high. The firm disputes it has been ordered to halt production, but so bullish is sentiment the market has shrugged it off and continued to buy copper.

Following years of oversupply, robust demand for copper, particularly from buildout of charging networks required for electric cars and infrastructure for the integration of renewable energy investments, is driving expectations of further price rises, according to the Financial Times. As a result, prices hit U.S.$7,312/metric ton last week, the highest level since January 2014, as import data for China showed November refined metal imports jumped 19% to 329,168 metric tons.

While demand appears robust, the impression is developing that the supply market will be squeezed next year.

The Financial Times reports that analysts at Citibank estimate that nearly 30 labor contract negotiations are set to take place in copper-mining countries next year, potentially affecting 25% of global mine supply.

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Q1 could see prices take a breather and may present a time to buy forward if prices come off a little. Chinese New Year holidays often see a run-up in demand before the holidays, but overall the quarter suffers from the prolonged closedowns.