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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.

The U.S. Department of Commerce. qingwa/Adobe Stock

Do we have a case of genuine material injury to U.S. jobs or do we have a case of commercial shenanigans in Boeing’s application to the U.S. Department of Commerce reported imposition of triple digit duties on Bombardier’s sale of new C-Series jets to number two U.S. airline Delta Air Lines?

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Boeing had called for countervailing duties of 79.41% to offset what it described as harmful Canadian subsidies to Bombardier. It also identified a “dumping margin” of 80.5%, based on the unpublished prices at which it claims Bombardier sold the C-Series planes to Delta, for a combined border charge of just under 160% on the Bombardier jets.

Delta, placed an order for 75 of the 100- to 150-seat single aisle C-Series jets some 18 months ago, according to Reuters. While the list price starts at $79.5 million, new project early sales typically enjoy substantial discounts to generate interest in the program and generate an early start to production. In that respect, initial launch discounts are common in the airline industry — whether they constitute dumping is debatable. It may be simplistic, but if all airlines do it then no one airline should be penalized.

Boeing claims that Delta received the planes for $20 million each, well below an estimated cost of $33 million and below what Bombardier charges in Canada. So far inconclusive, the numbers suggest — possibly, if correct — extreme discounts and some action may be valid.

However, dumping prices are usually imposed on products imported into a country. In this case, Delta’s order is to be manufactured on a new assembly line at Airbus’ factory in Mobile, Alabama, technically making it a U.S. airplane.

But this assembly option has arisen only in recent months following Airbus’ surprise move last October buying a majority stake in the struggling C-Series program.

At root, this could be a large part of the issue.

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It is often easier to criticize from the outside than to resolve from within — that is as true of boardrooms as it is of government.

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It should come as no surprise that President Trump’s well-intentioned claims during his election campaign to bring American jobs back to American steel mills — “When I’m president, guess what, steel is coming back to Pittsburgh,” he said during an April 2016 rally — have proved much harder to achieve in office than may have appeared to him and his supporters on the campaign trail.

Some believe the protectionist, low-hanging fruit of withdrawing the U.S. from the Trans-Pacific Partnership and ordering investigations into trade pacts such as NAFTA and the KORUS FTA have, if anything, exacerbated problems for domestic steel mills by prompting a flood of steel imports from firms trying to bring in steel before tariffs are hiked or other barriers are imposed. The New York Times has been accused — with some justification — of running an agenda counter to the Trump administration’s policies, but the facts are clear: steel imports have boomed since Trump came into power.

Source: New York Times

U.S. steel imports were up 19.4% in the first 10 months of 2017, compared to last year’s figures, according to the American Iron and Steel Institute (AISI). The New York Times points to ArcelorMittal’s decision to close a furnace at its Conshohocken, Pennsylvania steel plant in the new year, laying off 150 of the plant’s 207 workers as evidence of the impact. ArcelorMittal blamed low-priced imports, as well as low demand for steel for bridges and military equipment — both areas Trump promised he would make a key focus for investment if elected.

Although progress on trade issues has come too late for workers at Conshohocken, it is not too late for the industry as a whole.

The administration appears at odds over how to achieve control over imports, with some advocating hefty tariffs, others quotas, and all awaiting the results of the Department of Commerce’s 232 investigation by Jan. 15. The president will then have 90 days to decide what to do, the New York Times states.

If supportive and the report is acted on, plants like Conshohocken stand to benefit the most. Although underutilized at present, its speciality is ultra-strong, military-grade steel (a national security requirement if ever there was one).

Blocking imports, though, is not universally popular.

The auto industry frets that reducing imports will raise prices and impact competitiveness among domestic automakers, resulting in job losses worse than those experienced by the steel industry.

Source: New York Times

The steel industry itself has largely maintained employment over recent years after recovering from the financial crisis of 2008, despite investing in automation, which has helped improve efficiencies and productivity in the face of significant imports from Canada, eastern Europe and elsewhere (China features less nowadays and is well down the list due to earlier anti-dumping legislation).

Quite how the administration balances these competing priorities of domestic steel producers versus domestic steel consumers remains to be seen. Rhetoric so far this year suggests sympathies lie firmly with producers, but legislation needs to be finessed enough not to cause more damage than it intends to avoid.

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As we say, criticizing from the outside is much easier than finding solutions from within. Coming up with viable solutions will be the administration’s big challenge in 2018.

The electric vehicles (EVs) market could increase by 3,400% by 2030 compared to 2015 EVs sales, according to the U.S. Department of Energy.

More powerful, reliable and cost-competitive batteries have driven EV growth. Lithium-ion batteries have effectively replaced lead batteries.

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MetalMiner analyzed the usage of base metals in EVs and their price performance this year. The EV boom has driven investor sentiment for these base metals.

Base Metals’ Role in EVs

The infographic below breaks down car parts by type of base metal. Aluminum, nickel, copper and tin serve as the four main base metal “winners” in which the market could expect demand to grow.

Source: MetalMiner analysis of Business Insider data

Aluminum, Copper and Nickel

Of the exchange-traded metals, all three of these base metals commonly have high trading volumes. Copper, in particular, tends to have high trading volume as the market considers it an economic indicator (often referred to by the nickname “Dr. Copper”).

Both aluminum and copper appear in an uptrend, especially since the summer when prices started to rally.

Nickel prices have also seen high volatility due to electric battery demand. This makes sense — if investors consider a metal  “hot,” then volume and transactions may increase. Prices may change based on  this, as they did for nickel.

Source: MetalMiner analysis of FastMarkets

And What About Tin?

Contrary to the other three base metals, tin prices do not look bullish.

Tin plays an important role in EVs, as it is used for electronic solder and batteries. However, tin prices appear both stagnant and weak.

Source: MetalMiner analysis of FastMarkets

Tin’s price momentum has diverged from EV supply/demand fundamentals and the LME price.

EV batteries have evolved toward technologies that include more tin alloys. According to the International Tin Research Institute (ITRI), tin used for batteries increased by 95% in 2016 compared to 2010 data (14,400 tons). Tin mine output has increased in 2017 compared to last year’s data (18% in China, 26% in Indonesia and 7% in Myanmar).

However, the ITRI forecasts a 7,300-ton deficit in 2017. Tin stocks remain low, with only a slight increase in SHFE stocks.

Free Download: The December 2017 MMI Report

Current macro indicators support the bullish rally. However, tin prices still seem reluctant to react.

Have investors forgotten about tin?

Judging by the reception for aluminum, copper and nickel, perhaps 2018 will bring tin into the bull party.

China is the world’s top producer of steel, but it hasn’t been that good or profitable for years.

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Despite, or more likely because of the supply side squeeze enforced by Beijing, possibly up to 100,000 tons of “illegal” (not approved) production capacity has been closed down. Much of this was Electric Arc Furnaces (EAF) based on scrap raw material and deemed too polluting to be tolerated by Beijing.

In practice, EAF technology is anything but polluting and should be preferable environmentally to the blast furnace route. However, much of China’s capacity was small-scale private plants lacking environmental controls and permits.

According to Reuters, quoting CRU data, China’s steel capacity has fallen by 240 million tons over the past three years to about 1,020 million tons this year. Ironically, production has never been higher. It rose 6% from January to October, according to Reuters, and 2017 is set to be an official record high.

The key word here is “official” because historically none of this “illegal” capacity appeared in the official figures, so approved mills are running at near record capacity, estimated to be 85%, making up for the removal of their domestic competitors. Many of these EAF furnaces were making rebar, so not surprisingly rebar is in short supply and prices are on a tear.

Iron ore, particularly higher grade 65% minimum Fe content iron ore is also doing rather well. Despite port stocks running at over a month’s supply prices have reached over $72/ton as mills re-stock with the most efficient-to-produce and least polluting highest grade ore, according to Bloomberg.

All this rationalisation of supply and robust domestic demand has taken its toll on exports. As we reported earlier this week, China’s steel exports have slumped by a third this year. And as the domestic market gradually moves from a buyer’s market to an allocation-driven seller’s market, prices are rising. Read more

Just as legislators in the U.S. and Europe are taking increasingly strident action to curb imports from countries like China under anti-dumping legislation, the tools available to them are being withdrawn.

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Historically, China and a number of other emerging markets have been classified as non-market economies. This means that the state plays a major role in allocating resources and setting prices, making the cost of products less relevant to the economies of manufacture. Under U.S. law, a non-market economy is defined as one that does not operate on market-based principles, and therefore, its prices for final goods do not (necessarily) reflect fair value.

We talk of China in this context because the country is the world’s largest non-market economy, but it is far from alone: there are many other emerging and previously emerging markets that are classified accordingly.

There lies the problem. China is being reclassified, at least in Europe, under a deal negotiated in October. The Telegraph reports that the full European Parliament then offered its endorsement last month, just leaving national governments to give their final approval on December 4.

China has been pushing hard for its economy to be re-classified. Some suggest that the EU agreement was in part motivated by a desire to improve trade with China. After the U.S., the EU is China’s second largest trade partner.

However, many European manufacturers are probably thinking, “Be careful what you wish for.”

As the article points out, these changes mean it will be harder for European companies to argue they are competing against subsidised competitors, with the new system being more flexible in determining whether domestic producers are being undercut. Anti-dumping measures are in place for some grades and forms of steel and for aluminium foil at present, both of which would be harder to renew if the change in status is accepted. Read more

Media coverage of the Section 232 investigations — which could potentially curb imports of steel, stainless steel and aluminum into the U.S. — have spooked importers, consumer groups and some manufacturing industries.

These fears are misplaced, according to Barry Zekelman, executive chairman and chief executive officer of Zekelman Industries. “Steel has been the most abused product on the planet,” he says.

What makes Zekelman’s point of view on trade so fascinating?

The fact that he is not a steel producer! (That, and his ever-colorful examples…our headline above is a case in point.) Take a listen to our conversation:

The Rise of Zekelman Industries

His story sounds like the American dream – a tale of how Zekelman and his brothers were thrust into their father’s fledgling business after their father’s sudden passing. He left college as a freshman to help save the pipe manufacturer.

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The 14-strong Organisation of Petroleum Exporting Countries (OPEC), along with 10 oil states outside of the cartel, has reached an agreement to limit oil output until the end of 2018. This decision comes after what has already been more than a year of production cuts, the Telegraph reports.

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This new deal, wider and more inclusive than the one running since the beginning of this year, will also extend to Nigeria and Libya. Previously, these two countries were exempt from the production quotas, despite being OPEC members, because of their struggles with internal political unrest.

OPEC crucially reached an agreement despite the last-minute posturing from Russian oil minister Alexander Novak, who warned that oil prices above $60 a barrel could reignite a production boom in the U.S. shale industry.

The agreement reached by the OPEC and non-OPEC members faces several serious challenges in achieving its objective of stabilising oil prices. The first is that one of its core members, Russia, does not appear to share the same objectives. They may be saying the right things, but according to Georgi Slavov, head of research at broker Marex Spectron, Russia’s cooperation is mostly “in words.”

“In reality Russia has been pumping oil like crazy and this will likely continue. As prices rise the incentive to cheat will too. Others may join the party,” Slavov said. “It is astonishing that the entire market is ignoring this. The market’s fixation is currently on what could happen. However, it is not paying attention to what is actually happening.”

A later article throws further light on the Kremlin’s position, saying Russia has a higher tolerance for depressed prices since the floating rouble cushions their budget.

Russia aims to balance the books at oil prices of $44 by 2021 under its fiscal plan, compared to $113 four years ago. Supported by ultra-low production costs, Russia is loath to cede market share and worried that prices above $60 a barrel will re-ignite significant U.S. shale activity, bringing prices down and reducing everyone’s market share as the same time. Read more

Over the past half-year or so, it seems as though the cannabis industry is putting out a new press release every other day. And due to relatively recent state-by-state legalization, cannabis’ economic boom and the growth of its supply chain seems legit enough to spawn this spate of news.

In fact, just before beginning to write this article, I received another release on the latest industry growth numbers. And news just broke that the county in which MetalMiner HQ is based may get legal marijuana on an advisory referendum next March. Salad days for the green goddess!

Why go into all of this? Cannabis may have a lot to learn from the industrial metals sector when it comes to commodity price volatility and risk.

Cannabis (vs. Other Commodity) Price Volatility

In their recent report shared with our sister site Spend Matters, Cannabis Benchmarks (in some ways the MetalMiner Benchmark for the green sector), we can see how volatile cannabis prices are compared with other agro commodities:

Courtesy of Cannabis Benchmarks

Not surprisingly, the report states that “market price volatility can be troublesome for all the participants in the value chain.” That is precisely why most supply chain players should begin thinking strategically about managing supply — and not just price — risk (more on that in the next section).

Also not surprisingly, while traditional supply and demand factors such as weather drive many agricultural markets, “significant price jumps in regional cannabis markets appear to still be driven largely by regulatory decisions,” which we’ve reported on in detail. With cannabis remaining illegal under federal law, this is a trend unlikely to change in the short term, according to the report.

The paper goes on to outline the basics of hedging for participants in the cannabis supply chain — including the 101 on spot versus forward buying and contracts, OTC markets and swaps — with some examples to lay out what’s possible for the buyers and sellers within the nascent market.

Managing commodity price volatility and risk requires beginning to think about it strategically. Lisa Reisman, executive editor of Spend Matters’ sister site MetalMiner, knows a thing or two about that.

3 Reasons for a Commodity Management Strategy

Here’s more on how to begin framing the need for hedging strategies from Reisman (read the full article for more detail and examples):

  • Cost
  • The notion of supply chain transparency. Knowing how each entity within the supply chain prices its products and services only helps the buying organization better understand total cost of ownership (TCO).
  • Margin risk. By leaving the burden of extending quote validity periods or holding current pricing for longer periods of time to suppliers, the buying organization cedes control of its own ability to manage margins.

Ultimately, the cannabis industry is such a nascent frontier that now is the time for participants can begin hashing out their own agreements, using benchmark indexes, specifications and the basics of hedging, according to the Cannabis Benchmark report.

“In other commodity markets, such contract standardization has been created by participant pools, cooperatives, federal entities, and international organizations,” the report states. “Given the projected volume of transactions and currently planned centralization of distribution, the first actively traded hedging markets for cannabis could conceivably occur in California within a year.”

“It is contingent upon the industry to come together and create the framework and standards for this potential to be realized.”

Read the original article over on Spend Matters here. Need more specific guidance around commodity price risk management strategy? Contact us!  

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It seems almost churlish to remind Zimbabweans who are celebrating in the streets following the announcement last week that tyrant Robert Mugabe has finally been forced by his own party (and the military) to resign after 37 years of progressively more authoritarian rule, that his removal was the relatively easy bit.

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Now begins the long journey of stitching back together an economy devastated by decades of corruption and mismanagement. That period has left the average per capita GDP in Zimbabwe at just $1,008, less than a fifth of that in neighboring South Africa.

The military seems content with replacing Mugabe with one of his closest aides, former Vice President Emmerson Mnangagwa, many fear they are simply replacing one tyrant with another.

The authorities are at pains to maintain a veneer of legitimacy to what is in effect a coup, but the proof of the pudding will be if free and fair elections are held within a reasonable time frame. Mugabe claimed he was democratically elected, but, in reality, although in 1980 he was voted in on a broad-based groundswell of popular support, widespread vote rigging and intimidation has assured his re-election for the last twenty years.

The tragedy and opportunity for Zimbabwe is the country is fabulously blessed in natural resources.

Tragedy, because as in so many African countries, politicians have been unable to resist the temptation to blunder any source of wealth for their own ends — think Nigeria, the DRC and South Sudan — but blessing because at least the country has the means, if they can find the political resolve, to turn the economy around.

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