Commentary

So much has been written in recent months about China and the Chinese aluminum market that we are in danger of losing sight of the performance of major producers outside of that market.

Free Download: The May 2017 MMI Report

The position of producers like Alcoa and Rusal arguably have more impact and more significance for Western consumers than those behind the tariff barrier walls of China’s borders. The Financial Times reported last week that Rusal (still the world’s second largest producer, according to Statista) is in robust health and has reported rising profits on the back of stronger first quarter prices.

According to the FT, net profit for the first three months of the year was $187 million, up 48% from $126 million in the same period last year, on the back of 20% rise in revenue to $2.3 billion. While not quite reaching analysts’ predictions, it allowed the firm to reduce debt levels and encouragingly was achieved on the back of only a modest 0.7% increase in production to 910,000 metric tons. Likewise, alumina production was up a correspondingly small 0.9% to 1.889 million tons.

Costs, however, have remained a bugbear with electricity prices, transportation – principally railways, and other raw material costs rising in Q1, in part due to rising commodity prices but also due to a 6.7% strengthening of the ruble.

Nevertheless, demand growth remains robust, and supply outside China remains relatively tight with the forward market spreads not favouring the roll-over of stock and trade storage of primary metal with only a 3.5% margin over 18 months.

Much will depend on China going forward and how seriously Beijing continues to pursue its policy of clamping down on environmental non-compliance and limiting new smelter investment. Aluminum demand in China grew at 7.5% in the first quarter, according to Aluminium Insider, and it is growing at 5.0% in the rest of the world.

Free Sample Report: Our Annual Metal Buying Outlook

Prices may have slipped back of late but that was probably to be expected after the surge of enthusiasm following Beijing’s clampdown. As the realisation sinks in that China’s winter heating period closures are still six months away, some softening is to be expected.

There are certain models that economists use to explain markets or to illustrate market behaviour. Cyclical commodity markets are one such model, and the principle of swing producers is another.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Among metals, nickel has been a wonderful example of both in recent years, and a Financial Times article written by a team from consultancy Woods Mackenzie ably illustrates how the metal’s current poor price performance is a result of both.

Cyclical commodity markets are invariably caused by violent swings in supply and demand. In times of rising prices, miners invest in new mines. As they take time to come to fruition, they often unhelpfully come in at the end of a commodity bull run, flooding the market with oversupply just as demand falls. Prices then collapse.

In the case of nickel, as the article reported, five years of surpluses meant nickel prices have more than halved between 2011 and 2015. Having just invested in new capacity, the miners tend to be slow to adjust. But in the end, mine closures ensue, and in the case of nickel, this resulted in the loss of about 6% of global mine supply. Supply, however, has remained more than adequate with many countries competing for market share. Read more

If I had to pick a base metal to put my money on this year, it would have been aluminum. The lightweight metal presented an attractive bullish narrative due to the combination of rising political tensions and the potential for supply cuts in China.

Two-Month Trial: Metal Buying Outlook

China has pledged to cut as much as 30% of its aluminum production over the winter months to reduce emissions from one of its most energy-intensive industries. In addition, the country has received a lot of international pressure to reduce its aluminum capacity.

The U.S. is trying to find new ways to make things difficult for Chinese aluminum exporters. Recently, President Donald Trump signed a memo to order an acceleration in the investigation of aluminum imports, citing concerns over national security. Last week, the Wall Street Journal reported that massive state-run Chinese companies helped China Zhongwang finance an illegal game of moving stockpiles around the globe to avoid paying punitive import tariffs to the U.S.

If we narrowed our view to the industry fundamentals, it would be hard to expect any downside in aluminum prices. However, broadening our view, there are a couple of factors that could put a downward pressure on aluminum for the rest of the year, especially after such a steady rise.

Potential Slowdown in China’s Demand

As I mentioned yesterday, “China is putting efforts into halting risky lending and rising borrowing costs in order to limit credit growth. Interest rates in China have risen to the highest level in two years while China’s tough talks on curbing credit are expected to put the brakes on credit growth, [hurting demand for industrial metals.]” Read more

Regular readers of The Telegraph, arguably Britain’s only remaining decent broadsheet paper, will be familiar with the writings of Ambrose Evans Prichard, the international business editor.

It has to be said that he has a slightly sensationalist reporting style, but his articles are always liberally supported with facts and figures. Even though he seems to argue more often than not that markets about to drop off the edge of a cliff, he has, at times, been right. Yet an article this week titled “Commodities slump on China tremors and OPEC failure,” while making a plausible argument based on the facts and figures presented, could equally have an alternate explanation if one looks over a slightly longer timeframe.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Clyde Russel of Reuters takes just such an approach in an article posted just a day or so later, which all goes to underline the challenge for buyers in interpreting fundamental supply and demand data and extrapolating workable strategies.

Source: The Telegraph

The Telegraph looks at a gradually sinking Brent oil price coupled with falling Chinese crude oil imports, and it suggests that the former is in part a result of the latter. Reuters looks at the same data, and whilst the article acknowledges that imports are down in April, it goes on to look at the last 12 months trend line.

Reuters notes that in the first four months of 2017, crude oil imports were up 12.5% from the same period last year to around 8.46 million bpd. The article goes on to point out that this is also substantially higher than the 7.6 million bpd imports averaged for 2016, suggesting that China’s appetite for crude has jumped substantially so far this year, notwithstanding the pullback in April. Read more

Earlier this decade, there was no lack of hype around electric and hybrid cars. Sales were expected to take off, driving demand for lithium, nickel, cobalt and a host of rare earth elements above supply.

That was, in part, motivation for a rare earths bubble, but demand have remained manageable as high sales of electric vehicles have failed to materialise. In reality, electric and hybrid cars have gained traction only gradually as the range of EVs grew and as hybrids struggled to make dramatic improvements in fuel efficiency resulting from advances in internal combustion, particularly diesel engine technology.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Sooner or later, however, a combination of improving technology and pressure from legislation forcing changes in buyer choices should result in electric vehicles merging into the mainstream. A sure sign that the day is drawing nearer would be when established main brands set targets for themselves.

Well, this week Volkswagen did just that. The Financial Times covered an announcement made by Herbert Diess, head of the VW brand (the largest part of the VW Group), that the brand would sell one million electric cars by 2025 and leapfrog Tesla as the world’s premier volume EV manufacturer. As part of VW’s central plan, the FT reports, the firm is going to sell electric cars at the price of today’s diesel models and intends the entire electric fleet to be profitable from day one. Read more

President Donald Trump has come in for a fair amount of criticism for his perceived failure to achieve many of his campaign promises in the 100-day deadline he set himself (and now denies, but that’s another issue).

Implementation of a case against China as a currency manipulator and building the U.S.-Mexico border wall has given way to the greater pragmatism of coercing China to put pressure on North Korea with both carrot and stick incentives, and of a “last minute” retraction of a supposed imminent announcement to withdraw from the North American Free Trade Agreement (NAFTA) last month as a precursor to talks down the line.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The Economist, as usual, gives an impartial and balanced assessment of events in two recent articles. The first reports that although the president has not been able to implement much of the headline objectives, the combination of executive orders, tweets and off-the-cuff announcements have set in motion a number of significant developments.

Pulling out of the Trans-Pacific Partnership (TPP) gave a clear message from day one that here was a president who meant what he said — that you took all the bluster as hot air at your peril. The very uncertainty in his lack of planned policy and spur-of-the-moment reaction to events has put trade partners, friends and enemies alike on uncertain ground — not a bad negotiating position to force on the other side, if you see all interaction as a negotiation.

More significantly, the U.S. has started an investigation into whether steel imports are a threat to national security and followed up with a similar probe, announced late last month, into aluminium imports. Trade negotiators at home and abroad are said to be aghast at the former leader of the rules-based trading system and a major backer of the World Trade Organization completely shunning the system it created and resorting to obscure legislation to achieve the president’s promises. Read more

Proposals based on environmental grounds to limit polluting industries in the greater Beijing area during next winter’s primary heating period (November to March) gave a boost to the aluminum market from the moment they were first mooted last year.

Beijing’s robust implementation of environmental audits and regulation of aluminum plants this year have added to a sense that the authorities are getting serious about pollution and the environmental impact of energy intensive industries like aluminum smelting. But, as Reuter’s columnist Andy Home opined, it is protectionism in the rest of the world that is going to add backbone to these trends and act as the driving force behind further action on Beijing’s part.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

In an article this week, Home explained how the latest investigation into aluminum imports, along the same lines as an earlier steel case, has been launched under Section 232(b) of the Trade Expansion Act of 1962, which lets a president act against imports on national security grounds. The reasoning is the U.S. has but one smelter left in operation, Century’s Kentucky smelter, capable of producing the high grades required for defence and aerospace companies making combat aircraft and the like.

China supplies almost no primary aluminum to the U.S. market. Following U.S. smelter closures, surging imports are being increasingly met by Russia and the United Arab Emirates, while the bulk continues to be supplied by Canada, as the graph below from Reuters shows.

Where China has an impact is in semi-finished products, such as sheet, plate, foil, bars, tubes and sections. Here the growth of Chinese exports to the world — and U.S. imports — has been much more significant. According to Home, on that measure China has been by some margin the largest-volume supplier to the U.S. market in recent years. Read more

No one factor has led to the turnaround in the fortunes of Europe’s steelmakers. While still not spectacular, global growth is certainly broader-based and better distributed that it was a few years ago. The fortunes of the European steel industry have improved markedly since their low point in late 2015, with prices rising some 45%, according to Reuters.

As with virtually every ferrous and non-ferrous metal, China has been a key component. Responsible for over 50% of global production capacity, China’s steel industry was undoubtedly a contributor to low prices around the middle of the decade. Beijing’s decision to cut capacity while boosting infrastructure spending has certainly resulted in increased domestic demand and reduced Chinese exports.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

China announced its intention to cut 100 to 150 million tons of steel capacity by 2020 in part to tackle pollution. It was also to address a rising tide of protectionism around the world fearful of the impact China’s excess supply was having on producers in home markets. According to Reuters, China cut 60 million tons of steel capacity last year and plans to cut another 50 million tons this year. There remains considerable debate as to how much of last year’s capacity closures really curtailed production and how much was simply the permanent closure of already mothballed or idle plants.

But either way, in conjunction with the $700-billion stimulus package targeted mostly at infrastructure and construction, Chinese steel prices jumped over 70% last year, while exports fell 3.5%. Even better news for overseas producers has been exports dropped a further 25% this year in part many would argue due to some 39 anti-dumping and anti-subsidy measures introduced in Europe over recent years of which 17 are directed at China and some 150 similar duties in place in the U.S. Read more

This is the second in a two-part interview with Paul Noel, senior vice president of procurement solutions at Ivalua, Inc. Missed Part 1? Read it here.

MetalMiner: How do you see procurement and supply chain applications overlapping (or not) from a technology perspective in manufacturing? What is “the line” between them (if there is one anymore)?

Paul Noel: Procurement and supply chain applications traditionally overlap. Both these applications have the following:

  • Supplier master data and item master data
  • New product introduction data, such as BOM, designs, specifications and project plans
  • Product quality data, such as initial reviews, quality certs, first article inspection data, APQP reviews and data
  • Supply chain and supplier risk data
  • Supplier performance, KPIs and error data, along with improvement plan data
  • Assets and tooling data, including supplier loaned and leased assets
  • Inventory data, such as central, in-factory stock-rooms, vendor managed inventory data, etc.

Our view is that procurement applications are developing and innovating at a more rapid pace than supply chain applications when it comes to affecting core business operations, expanding their functional footprint into the supply chain, and in some cases, becoming the primary master source of record (e.g. in case of supplier master and risk data). As an analogy, procurement applications today represent multiple “garage bands” — some in the process of becoming rock stars — of the business, while supply chain is a conductor, orchestrating activity deep within the supply base. Both are different — and needed.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Supply chain is, however, continuing to orchestrate activity.

MetalMiner: What is your view on commodity price volatility? What are you hearing from your customers?

Paul Noel: The most current information is key, of course. That means that when you are buying volatile commodities, you need to have a facility to quickly perform item validations with contracted vendors to ensure you are seeing the best price for the current market. In some industries, it needs to be a lights-out operation that reminds suppliers of their commitments and solicits their re-bids on a schedule. This isn’t just asking for the latest price, but also changes in packaging, lead time, ship-from information and so forth. Read more

President Donald J. Trump has completed his first 100 days in office and thus far has signed into law 28 pieces of legislation.

While Trump has made traction in some respects, the fate of the nation’s steel industry was still up in the air — that is, until Trump signed a Presidential Memorandum in late April calling on Department of Commerce Secretary Wilbur Ross to prioritize an investigation into the effects of steel imports on U.S. national security.

Two-Month Trial: Metal Buying Outlook

Here are three things you should know about this directive and what it could mean for the nation’s steel industry.

The Trade Expansion Act of 1962

The investigation is being conducted under Section 232 of the Trade Expansion Act of 1962. According to the Department of Commerce, Ross is tasked with determining the following:

  • “Whether steel imports cause American workers to lose jobs needed to meet security requirements of the domestic steel industry;
  • Any negative effects of steel imports on government revenue; and
  • Any harm steel imports cause to the economic welfare of the U.S.”

The Current Situation

Despite an existing steel industry, steel imports saw a 19.6% year-over-year increase in February, and, currently, imported steel accounts for 26% of the U.S. market share, according to the Department of Commerce.

Further, the U.S. steel industry is only operating at 71% capacity, and jobs in the industry has continued to take a steady hit. Read more