Commentary

(Editor’s note: The following is a guest post from C.J. Nord, C.P.M., CSCP, founder of the nonprofit Supply Chains for Good, and Harry Moser, founder and president of the Reshoring Initiative.)

Don’t hold out hope for the U.S.’s stainless steel shortage to get better until you know of new supply coming online.

There appear to be no plans in the works to increase domestic production. Supply may tighten even more than we have seen. This is similar in scale to the chip shortage.

Stainless steel shortage factors

ATI logo

Casimiro/Adobe Stock

Like almost all factory shortages, multiple factors have led to the stainless steel shortage.

The shortage became a national concern in January 2021, when ATI Metals took 304 stainless offline and shifted production to 316 grade.

The news of that change didn’t make it downstream. Our nation is still underinformed about the shortage of this type of steel. Stainless is critical for multiple applications in a broad range of industries.

The ATI change took roughly 30% of our nation’s supply offline. Furthermore, only about 10% has come back online (these are rough numbers based on our surveys of users and distributors).

If a mill decides to bring 304 online, it could take as much as a year for supply to reach the distributor level.

This is a long-term, painful shortage.

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Metals will play a significant role in helping governments and companies to address climate issues by aiding the transition to cleaner energy and ultimately decreasing carbon emissions, industry watchers said.

“The metals industry is crucial to facilitating this,” one analyst told MetalMiner.

“If you want energy transition, it is not going to happen without metals and mining,” the analyst added.

His and other analysts’ comments come as the 2021 United Nations Climate Change Conference, also known as COP26 (Conference of the Parties), which took place in Glasgow from Oct. 31-Nov. 13.

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Phasing out coal

carbon emissions

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The conference ended with an agreement to work towards limiting an increase in global temperature to 1.5 degrees Celsius. Chief amongst the steps to achieve that is the limiting of coal.

Up to 40 countries had originally planned to “phase out” coal usage in the next 10-20 years. However, the world’s largest users — China, India and the United States — were able to change the wording to “phase down.”

Much depends on China and what it does with coal, however. That includes running power stations and providing feedstock for steelmakers’ coking ovens, the first analyst said.

“I don’t doubt that China will wean itself off of coal,” the first analyst said, “but the reality is that coal will be around in another 30 years.”

Other parts of the climate agreement included 100 countries’ agreement to achieve a 30% cut in methane levels by 2030. Indian Prime Minister Narendra Modi also announced at the conference his country’s plan to achieve net-zero carbon emissions by 2070 as well as to achieve some reduction by 2030.

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In the first part of this series, we discussed monetary inflation, the history of gold as a store of value and how digital assets, like Bitcoin, may be the next big thing in the technology of money.

Bitcoin and gold

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The narrative of gold being the premier store-of-value asset has captivated like-minded investors for centuries. In this follow-up piece, we will compare gold and Bitcoin across the first three properties of sound money: portability, uniformity and divisibility.

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Portability

An important part of any money is one’s ability to transport it across space and time. What good is any form of money that you can’t bring with you?

The portability of gold largely depends on the quantity one owns. For example, a few gold coins are extremely portable and can be stored in a wallet or a pocket. However, a larger investor will have more trouble moving large quantities.

Gold is currently trading at approximately $1,800/oz. An investment of $180,000 in gold weighs in at around 6.25 pounds. Meanwhile, an investment of $1.8 million weighs 62.5 pounds (and so on). A wealthier individual might not care as much about transportation costs. However, the larger the gold investment is, the more difficult and costly it will be to send across the world.

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$3,623,000,000,000 — that is the increase of M2 money supply in 2020.

By now, there should be no surprise what the effect of printing 23% of total USD has on commodity markets.

Store-of-value assets Bitcoin and gold

Knut/Adobe Stock

Aluminum breached $3,000 per metric ton this week. Carbon steel price action is only now seeing moderate relief after what seemed to be a never-ending spike since August 2020.

Due to everchanging price increases, some manufacturers now face quotes that expire within 24 hours of issuance. It’s fair to say that the general MetalMiner audience has felt the pain of monetary inflation in some form or another.

M2 money supply chart

M2 money supply. Souce: Board of Governors of the Federal Reserve System (discontinued by the Fed since February 2021)

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Gold as a store of value

While MetalMiner’s expertise is primarily in base metals, we also like to keep a close eye on larger macroeconomic factors.

Avid readers of our market updates are familiar with occasional articles on oil, tariffs, and precious metals, such as gold.

During times of rapid inflation, gold has historically served as the primary vehicle among store-of-value assets for institutional investors — and for good reason.

The physical properties of element 79 make it practically indestructible. Unlike the dollar, gold also has a high stock-to-flow ratio due to steady mining activity.

Considering all of this, it’s questionable how gold has stayed relatively flat for the last year.

During the past 15 months, the dollar has trailed down nearly 5%. Meanwhile, gold has barely moved a percent compared to the price in June 2020 and previous all-time highs in 2012.

So, what’s the deal here? Is another speculative asset taking market share from gold? Or is this simply a market irregularity?

As the headline suggests, there’s a mysterious trillion-dollar elephant in the room: Bitcoin.

Rise of Bitcoin

Whether through general media conjecture or more focused education, the “B word” has no doubt permeated the minds of investors since the beginning of the COVID-19 pandemic. A 900% increase during an 18-month period is going to turn heads, one way or another.

The Bitcoin community often uses the expression “digital gold” due to the striking similarities of its properties to gold. Parallels in terms like “mining” are easy enough to spot.

But what is it that makes them similar in principle?

Historical gold price chart

Gold fixing price in London bullion market, based in U.S. dollars. Source: ICE Benchmark Administration Limited via Federal Reserve Economic Data

A brief history of metals as money

When looking at the history of civilizations, money has come in many forms: beads, salt, cattle, etc.

The core reason why all of these failed as monetary vehicles is largely due to ease of production. For example, if a small colony used rocks as a form of money, mining stone quarries could significantly increase the supply with minimal effort (i.e., inflation). As stone production was accessible even for ancient civilizations, the value of the stone is drastically devalued upon each new quarry founded, akin to the dollar devaluing upon each new dollar printed by the Federal Reserve.

As time progressed, societies introduced sounder forms of money. In fact, the term “sound money” stems from the sound gold made when dropped from a distance.

When metals became the primary usage of money, gold soon became the global monetary standard due to its core properties. Gold requires drastically more energy and resources to mine, making new production more difficult than other materials. The longevity of gold’s uniformity also provides assurance that it will not corrode or deteriorate over time. The sound money principles of scarcity and durability are the foundations of what made gold attractive as a store-of-value asset. It is also why countries have used it as a monetary standard for centuries.

However, in 1971, the United States officially got rid of the gold standard. Thus began the era of unbacked fiat currency.

Money in the digital age

The 21st century is what some might call the digital age.

In the past 10 years, we’ve witnessed the dematerialization of everyday things into a digital realm: photos on Instagram, music on Spotify, social interactions on Facebook, video on Netflix, and the power to access and distribute all of this to 7 billion people with smartphones and computers.

When Bitcoin was introduced in 2009, it began with modest roots at a market cap of only a few hundred dollars.

Today, Bitcoin stores over $1 trillion dollars’ worth of value. It is now accepted as legal tender in the country of El Salvador.

Blockchain, the technology upon which Bitcoin is founded, presents the idea of money itself dematerializing into digital, decentralized and trustless networks.

Over the course of the following weeks, we will candidly explore the similarities and differences between gold and Bitcoin across the six properties of sound money: durability, portability, uniformity, divisibility, scarcity and acceptability.

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You do not have to look too hard to find failures of state-run economies around the world. Since the collapse of the Soviet Union, there is less enchantment with the model — outside China, anyway —  than there once was.

But what we remain plagued with is the idea government has a role in the ownership, operation and pricing of “strategic assets.”

We wrote recently about power rationing in China due in part to a political spat with Australia. As a result, Beijing decided it was a good idea not to buy Australian coal. In turn, it deprived the country’s power sector of a major source of supply.

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India coal crisis

coal pile

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This week, we cover India. The state’s ownership of the monolithic Coal India mining company has for years led to underperformance, underinvestment and inefficiency.

A Reuters article paints a dire picture of the perilous state of the Indian electrical generating sector.  Coal stocks have gotten so low that many generators risk running out of supplies.

As of Sept. 29, the post reports, 16 of India’s 135 coal-fired power plants had zero coal stocks, quoting Central Electricity Authority (CEA) data. Over half of the plants had stocks that would last fewer than three days. Meanwhile, over 80% had less than a week’s stock left.

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The media has been buzzing with various interpretations of the UN Intergovernmental Panel on Climate Change (IPCC) report on rising greenhouse gas emissions and the likely scenarios before us for the next decade (and through to the end of the century).

Interpretations vary between “the end of the world is nigh” and “this is getting a little concerning and we really ought to do something about it.”

emissions

fotohansel/Adobe Stock

As metal buyers, it really doesn’t matter if we agree that climate change is manmade. Enough extreme weather events have happened over the last few years — the last few months, even — that most populations that still have any say over government policy are clamoring for action, fearful of the consequences of the opposite.

We won’t go into the climate change debate here. For us, the question is much narrower: what does this mean for metals markets and industry?

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IPCC report and the impact on metals

Rising sea levels, extreme weather, lack of rainfall will have an impact on both mining, metals refining and manufacturing operations.

The impacts, however, will vary greatly by location. As such, the winners and losers are hard, if not impossible, to predict.

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Walk down just about any major city in the United States and, eventually, you’ll walk past a city-installed garbage can.

Maybe you’ll see a classic black trash receptacle, with the black vertical paneling and open top. Or, maybe, you might see a trash receptacle with a top-side lid that opens and closes (like you might see down Chicago’s Magnificent Mile).

Whatever the case, at some point along the the line, the municipality procured those receptacles at a certain price.

city garbage and recycling cans

chaoss/Adobe Stock

The question is: how much should a garbage can cost?

A recent bit of news out of San Francisco got the MetalMiner team thinking.

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San Francisco proposes paying up to $20K for trash can prototypes

As reported by San Francisco’s local CBS affiliate, the City of San Francisco’s Department of Public Works wants to replace 3,000 city garbage cans.

The catch? The prototype it is considering reportedly costs a whopping $20,000 per can.

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Analysis, specifically what’s termed fundamental analysis of metal supply and demand, and its impact in driving metal prices, is often a blunt tool.

That is particularly true since the financial crisis. Then, traders and hedge funds discovered the wheeze of buying spot and selling far forward (typically from 18-month to a few years) when the market is in a strong contango (when the higher forward price is sufficiently above spot to more than cover the cost of storage, insurance and finance, leaving a profit for the company).

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Metal stock levels don’t match price movements

aluminum ingot

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As we all know, this has at times driven the creation of off-market inventory, sometimes termed shadow stocks, in non-exchange warehouses (because rents are cheaper).

For some metals, like zinc and copper, this has, at times, been hundreds of thousands of tons. For aluminum, it has been in the millions, dwarfing the exchange stocks on the LME and SHFE.

Trying to take these stocks into consideration is a nightmare. The LME’s increased reporting regime has helped. However, even so so-called shadow stocks are in their entirety at best an estimate.

So, when commentators say LME stocks have fallen as a justification supporting increased demand — or, vice versa, rising LME stocks are proof of weak demand — take such comments with a pinch of salt.

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The Financial Times is among many news sources reporting on the announcement made this week in Brussels that the E.U. and U.S. will end 17 years of litigation over claims and counterclaims that both Boeing and Airbus have received unfair state support in one form or another.

Both sides have won cases at the World Trade Organization (WTO) level. Those wins have resulted the threat of some $11.5 billion in tariffs on E.U.-U.S. trade in both directions.

NBC quoted U.S. Trade Representative Katherine Tai as saying the two sides have come to terms on a five-year agreement to suspend the tariffs at the center of the dispute.

The threat remains that the tariffs could be reimplemented if U.S. companies are not able to “compete fairly” with those in Europe. However, the statement left open quite how that would be prosecuted.

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Boeing-Airbus dispute nearing an end? Maybe not quite

Airbus plane

dade72/Adobe Stock

Much was made about moving away from litigation, a strategy that has clearly failed to achieve much after 17 years of lawyer fees.

“Today’s announcement resolves a long-standing irritant in the U.S.-EU relationship” Tai said.

“Instead of fighting with one of our closest allies, we are finally coming together against a common threat,” she added, stressing it is time to put aside the fight and focus on China’s economic assertiveness.

That final point underlines a key issue here.

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To protect or not to protect, that is the question for Brexit Britain.

Britain was taken into its rupture from Europe on the Global Britain ticket, with the promise of liberating new trade deals once it was unfettered by Europe’s stifling protectionist culture.

That’s not a bad mandate for change. However, it would seem that most of those who voted for Brexit missed the memo that free trade works in both directions.

Volatility is the name of the game. Do you have a steel buying strategy that can handle the ups and downs?

UK after Brexit

Brexit

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The U.K. has been successful in rolling over many of the trade deals forged by the E.U. into bilateral agreements. It can now continue with those arrangements in more or less the same guise after Brexit.

Some headline-grabbing new deals are in the cards. Those include ones with Japan and Australia.

But after Britain’s chief negotiator, International Trade Secretary Liz Truss, announced the imminent signing of a new deal with our friends on the other side of the world, howls of protest erupted in the media and among lobby groups against a feared flood of agricultural imports.

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