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This morning in metals news, Kobe Steel’s share price continues to plummet in the wake of its data falsification scandal, London copper hits a three-year high and palladium is having a strong 2017.

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Kobe Steel Shares Hit Lowest Price Since 2012

Kobe Steel, Japan’s third-largest steelmaker, continues to see its share price drop on the heels of its data falsification scandal.

The fallout from the scandal has already seen Kobe lose approximately $1.8 billion in market value, Reuters reported.

On Friday, Hiroya Kawasaki, Kobe’s chief executive, said about 500 companies received falsely certified products from Kobe, which was more than double a previously released number, according to the Reuters report.

LME Copper on the Rise

London copper is on the way up again, this time rising to hit a three-year high, Reuters reported.

The metal eclipsed the $7,000 mark, powered in part by good news on the Chinese economy, according to the report.

Palladium Powered by Automotive Demand

Recently, the palladium price recently eclipsed that of platinum for the first time in 16 years.

It’s been that kind of year for palladium.

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According to a CNNMoney report, 78% of palladium demand this year came from the automotive market.

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Trade negotiators from the U.S., Canada and Mexico are back at it again, working to tweak — or in some cases, totally alter — the North American Free Trade Agreement (NAFTA).

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Representatives from the three countries came together beginning last week for the fourth round of talks focused on the renegotiation of NAFTA, the 23-year-old trilateral trade deal.

The talks started Oct. 11 in Arlington, Va., and are scheduled to continue until Oct. 17.

U.S. Trade Representative Robert Lighthizer issued a statement opening the fourth round of talks.

The officials are scheduled to work on two dozen discussion topics during this round of talks, and recently finished a chapter on competition. According to a USTR release, the updated NAFTA Competition Chapter “goes beyond anything the United States has done in previous free trade agreements.”

“I am pleased to welcome back Secretary Guajardo, Minister Freeland, and their teams to continue negotiations here in Washington,” Lighthizer said in the prepared statement. “Thus far, we have made good progress, and I look forward to several days of hard work.”

Even so, cracks seem to be forming in the dialogue that threaten the stability of the talks and, consequently, the agreement.

As has been mentioned before, President Donald Trump reportedly nearly withdrew the U.S. from the trade deal in April until talks with the Mexican and Canadian leaders convinced him otherwise.

In recent months, Trump has resumed with threats against the deal, which he once called possibly the worst trade deal ever. Renegotiating the deal has always been a primary goal for Trump, with the understanding that should a favorable deal fail to materialize, he would withdraw the U.S. from it.

So far, the threats to withdraw from the deal have been just that: threats.

However, those threats have seemed to pick up as negotiations have continued. And when it come to negotiations, reports indicate a number of the U.S. delegation’s proposals are not going to go over well with their fellow NAFTA partners.

On Thursday, Reuters reported that the U.S. negotiating team suggested any approved deal should include a five-year sunset clause, meaning the deal would have to be effectively re-approved by all three countries in five years or it dissolves.

Naturally, this has a number of stakeholders feeling nervous, as such a sunset clause, businesses argue, creates uncertainty. With increasingly interconnected and entrenched supply chains, business interests view a sunset clause as a non-starter, as do Canada and Mexico.

In other policy proposals, Reuters reported Friday that the U.S. is pushing stricter rules on automotive content, particularly with respect to aluminum, steel, copper and plastic resins, in an effort to up the level of automotive materials sourced in North America.

As the talks continue, United Steelworkers again urged the administration to consider workers.

“It’s no surprise that business groups are concerned that NAFTA’s outsourcing provisions may be dramatically altered, and that provisions might be included to develop an agreement that is fairer to workers,” a USW release last week said. “Organized labor is working with the Administration to advance proposals that will promote growth and opportunity for workers in all three countries. A deal that achieves those goals would be worthy of our support.

“Businesses have set the agenda for far too long and the result has been rising trade deficits, lost jobs, devastated communities and rising income inequality.”

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The talks are scheduled to wrap up tomorrow, Oct. 17. According to the USTR, a trilateral press event including Lighthizer, Canadian Foreign Affairs Minister Chrystia Freeland and Mexican Secretary of Economy Ildefonso Guajardo Villarreal.

If you were in India right now, someone is bound to tell you that it’s that time of the year.

He or she would be referring to the almost-three months of festivals and wedding season, which India sees starting from sometime late August and continues until early September. More specifically, just under a week remains before that “mother of all Indian festivals” — Diwali, the fest of lights.

All this also means an uptick in shopping, but, more specifically, gold shopping.

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Indians love their gold, and any excuse is enough to buy some more of the yellow metal. But Dusshera (a major Hindu festival preceding Diwali) and Diwali are special occasions, reserved for buying as much gold as possible. All of this makes India the second-largest gold-consuming market in the world.

This year, there was a slight damper on Indians’ demand for gold.

As part of the new tax reforms, the government included jewelers in the Prevention of Money-Laundering Act (PMLA) in August. This meant a compliance requirement on part of the buyer for any purchase above US $760 (Rs 50,000), including providing their income tax identity.

Incidentally, gold and real estate are the two investment opportunities that were often misused by hoarders of cash or those dealing in the black economy.

For some time, then, there were no “high value” deals as jewelers across the country, their associations and potential customers protested.

So, while September import figures of gold (in the month of Dusshera) were robust, they could have been even higher if the PMLA was not in effect, some associations claimed.

According to a report put out by news agency Reuters, India imported 48 metric tons, equivalent to $2 billion at today’s prices, in September. But since Dusshera fell in September instead of October this year (it follows the lunar calendar), the import figures compared to September 2016 were up, though on a month-on-month basis, it was lower, because of the uptake being down due to the PMLA.

But a decision by the government a few days back has brought back the cheer in the lives of gold consumers in India.

The PMLA has been put on hold for now, which means people can go ahead and buy gold without providing any of the previously required documents. Jewelers are hopeful the gold-buying spree, normally seen during these festive months, will at least revive in October, especially around Diwali. Imports are expected to go up to about 70 metric tons per month.

Just to give readers an idea of Indians’ love of gold, Indian households have the largest private gold holdings in the world, standing at an estimated 24,000 metric tons. That figure reportedly surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

This year, even the Indian government wants to take advantage of the festive gold bonanza.

Showing impeccable timing, it has announced the launch of new sovereign gold bond schemes. Never before has such a scheme been announced around festival time.

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The bonds issue opened Oct. 9 and remain so until Dec. 27, covering the festivals of Diwali and Christmas.

The government has also made important changes to attract high-value investors, raising the annual investment limit per person from 500 grams to 4 kilograms. For trusts and similar entities, the limit was raised to 20 kilograms. This higher limit will make the scheme attractive for high-net-worth individuals who had not participated in earlier schemes, as they found the 500-gram limit to be too low.

Before we head into the weekend, let’s take a look back at the week that was. 

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  • In case you missed it, our October MMI report is out. Make sure to check out the free PDF download for the rundown on the last month for our 10 MMI sub-indexes: Automotive, Construction, Aluminum, Copper, Renewables, Rare Earths, Raw Steels, Stainless Steels, GOES and Global Precious.
  • Also, our Annual Outlook is out, too. Check it out for a comprehensive look ahead to 2018.
  • Coal India Ltd. is looking to diversify beyond coal, Sohrab Darabshaw wrote earlier this week.
  • Aluminum officials are in “wait-and-see mode” when it comes to the ongoing Section 232 probe vis-a-vis aluminum imports. The investigations into the national security impact of aluminum and steel imports were launched in April and have a January statutory deadline; at that point, Secretary of Commerce Wilbur Ross must present President Donald Trump with a report and recommendations.
  • Glencore bet big on zinc — and won, our Stuart Burns writes.
  • Although oil prices are well below 2014 numbers, supply cuts in some cases have seen the price start to climb. Are more cuts on the way, further constraining global supply and driving up prices? Burns wrote about the subject and what OPEC Secretary General Mohammad Barkindo called a “rebalancing process.”
  • In big news, Kobe Steel is in hot water for a data falsification scandal, one which threatens the firm’s credibility among consumers and manufacturers. The scandal has already had major financial ramifications, as the company’s share price has been in free fall since the news hit.

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This morning in metals news, NAFTA renegotiation talks continued with the U.S. aiming to tighten automotive content rules in favor of North American-made metals, Allegheny Technologies Incorporated (ATI) commented on its Q3 earnings and Alcoa reached an early termination agreement for a power contract tied to one of its Texas smelters.

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U.S. Looks for Stricter Auto Content Rules

Trade negotiators from the U.S., Canada and Mexico are in Arlington, Va., until Oct. 17, engaged in a fourth round of talks focused on the North American Free Trade Agreement (NAFTA).

According to a Reuters report this morning, the U.S. is seeking stricter rules for automotive content, demanding a higher percentage of the materials — including aluminum and steel — that go into automotive manufacturing should come from North America.

According to the report, the proposal — which includes aluminum, steel, copper and plastic resins — would place those materials on the auto parts tracing list for the first time in the history of the 23-year-old trilateral trade agreement.

ATI Expects Q3 Results to Meet July Outlook

ATI commented on third quarter financial results on Thursday, and announced a non-cash net of tax charge of $114 million, or $(1.05) per share, for goodwill impairment related to the Cast Products business.

“Excluding the goodwill impairment charge, we expect our third quarter 2017 results to be in line with our outlook provided in July,” said Rich Harshman, ATI’s chairman, president and chief executive officer, in a company release.

Alcoa Announces End of Power Contract Agreement

On Friday morning, Alcoa announced power provider Luminant Generation Company LLC has terminated the electricity contract tied to Alcoa’s Rockdale Operations in Texas.

The smelter at Rockdale has been fully curtailed since the end of 2008, according to the Alcoa release. The termination of the contract was effective Oct. 1.

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Alcoa expects an annual improvement to net income and adjusted EBITDA of $60 million to $70 million as a result of the contract termination, beginning in the fourth quarter of 2017.

Who would have thought it — a major Japanese corporation caught falsifying inspection and quality data?

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Japanese standards have come to be accepted as a byword for quality in the manufacturing industry — but it would seem in a world where even Germany’s premier automotive giants can cheat and deliberately mislead customers, so can the Japanese.

Who can you trust, consumers down the supply chain must be asking, if even Japanese and German manufacturers are prepared to lie and falsify quality assurance data?

The latest scandal to rock Japan’s manufacturing sector is an admission by the country’s third-largest steel producer, Kobe Steel, that for potentially up to 10 years they have been falsifying quality data.

As these goods have gone into aerospace, construction, automotive and transport applications, the only saving grace seems to be that checks so far suggest the material supplied has met the standards expected.

But as the investigation is in its early stages, there is plenty of scope for worse scenarios to unfold.

Some 20,000 tons of metals delivered to about 200 customers are said to have been affected this year, with not just steel but also aluminum and copper goods involved. The Financial Times reported products affected included: 19,300 tons of aluminum plate and extrusions; 2,200 tons of copper strip and pipe; and 19,400 cast and forged aluminum parts for customers such as Boeing, Toyota, Honda, Mazda, Mitsubishi Heavy Industries – maker of regional jets and the H-2A satellite launch vehicles.

Boeing issued a statement saying, “Nothing in our review to date leads us to conclude that this issue presents a safety concern, and we will continue to work diligently with our suppliers to complete our investigation.” That, however, hasn’t saved the share price from taking a pummeling.

Kobe shares are down over 40% this week. The cost of protecting the company’s bonds has quadrupled over the same period.

Source Financial Times

The company is desperately trying to get a handle on how widely and for how long the falsification of paperwork has been going on, and whether it also extends to Kobelco, the group’s maker of construction equipment.

Unfortunately for Japan Inc, Kobe is not alone in its misdemeanors.

Two weeks ago, carmaker Nissan recalled nearly 1.2 milliom vehicles that had been certified by unauthorized technicians. Last year, Mitsubishi Motors admitted to having overstated mileage figures for eight vehicles in its range.

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Is it too much to expect major corporations to tell the truth? They certainly trade on their brand image as reliable and high-quality manufacturers.

Such failures make something of a mockery of Western firms’ often disparaging comments about the quality of emerging-market competitors when their own systems and procedures appear little better.

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This morning in metals news, the world’s top copper producer expects a moderate rise in the metal’s price going forward, the Aluminum Association announces new leadership and Kobe Steel continues to reel from its data falsification scandal.

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Copper on the Rise

The price of copper is set to experience moderate increases, according to the mining minister of Chile, Reuters reported.

Aurora Williams, the mining minister of Chile (the world’s top copper producer), said Wednesday that there will be moderate increases in the metal’s price, but not enough to push it above $3/pound for the year.

According to the Reuters report, copper exports reached $3.18 billion in September, their highest level in nearly three years.

Changing of the Guard

The Aluminum Association announced new leadership on Wednesday.

Michelle O’Neill, senior vice president of senior vice president of global government affairs and sustainability at Alcoa, was elected as Aluminum Association Chair, becoming the first woman in the association’s 84-year history to hold the position. She replaced Garney Scott, president and CEO of Scepter, Inc., following a two-year term.

Kobe Steel Data Scandal Continues

It’s difficult to quantify lost trust, but it’s a problem Kobe Steel, Japan’s third-biggest steelmaker, is dealing with now on the heels of a data falsification scandal.

Now, the chief executive of the company is admitting the scandal is a serious hit on the company’s image, one that leaves it with “zero credibility,” The Guardian reported.

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According to The Guardian’s report, General Motors is the latest manufacturer to check whether its cars contain falsely certified parts or components sourced from Kobe Steel.

You could argue OPEC, and those non-OPEC producers collaborating with the oil cartel to limit output, have done rather well this year.

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The oil price, as measured by the most traded Brent Crude number, has been relatively stable since the agreement to limit output was implemented last year and excess inventory has been falling, aided by continued robust demand.

Bloomberg reports the comments of OPEC Secretary General Mohammad Barkindo: “There is a growing consensus that … a rebalancing process is under way. We are gradually but steadily achieving our common and noble objectives.”

We would take issue with the claim the objectives are noble.

Stitching up the market to support higher prices is hardly a noble endeavor, exploiting as it does the leverage of the few (producers) over the many (consumers).

But evidence suggests he is right in that the market is more balanced now than a year ago.

The question is: where is it going from March of next year, when the current agreement to restrict output expires?

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There are reasons why miners — indeed, all producers across industries — seek to dominate market share.

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The biggest reason? Being able to influence the market.

Yes, economies of scale come with size and in the case of mines to metal integrated trader Glencore that dominance in the zinc market gives them influence over not just mine output but concentrates, tolling and refining in a way that is not rivaled by any other firm.

Nor is the firm too kind to do things by halves — when they decide on an acquisition, on a market move, on a position, they do it decisively and with conviction.

In October 2015, Glencore sent shock waves through the market by cutting a third of its output, some half a million tons, to address what was widely seen as an oversupplied market and to stabilize prices. It worked — in just two years, the price has risen from $2,000/ton at the start of 2015 to $3,300/ton today.

LME zinc price, from October 2015 to October 2017. Source: LME

A Financial Times article states Glencore’s Australian Mount Isa and McArthur River operations took the brunt of the 2015 supply cuts, with output reduced by 380,000 tons. In total, the Glencore shutdowns removed 3.5% of global mine production, as the miner curtailed output from mines in Australia, Peru and Kazakhstan. In the meantime, end-of-life closures at Century in Australia and Lisheen in Ireland helped tighten the market.

Arguably Glenore’s action, while painful for zinc consumers, have in the long run done the zinc market a favor.

The rise in prices has supported the case for investment in new mines, such as Gamsberg and Duglad, due to come online towards the end of the decade. But even miners recognize you can have too much of a good thing, and limiting further price rises would not only help consumers but would help mitigate the demand destruction that comes from prices rising too fast and too far.

With that in mind, will Glencore look to bring back some, or all, of its idled capacity in 2018?

The firm continues to bet big on zinc, announcing last week its plans to increase its stake in Peru’s Volcan Cia Minera SAA, Bloomberg reports. With new mines due to come on stream in 2019 and 2020, supply constraints to the zinc market will eventually ease somewhat. Doubts remain, however, whether they will be enough to see the market in surplus.

Deshnee Naidoo, chief executive officer of Vedanta’s zinc unit, said a more sustainable zinc price would be $2,500-2,800 per metric ton. Others may argue with her, but Glencore has shown it can move markets and has the means — like Saudi Arabia did in the 1990s and 2000s with oil — be the swing producer, stabilizing a market for the benefit of both producers and consumers.

Traders often get a bad press for short-termism and the blind pursuit of profit, but Glencore has shown it acts in the longer term, too, and is capable of taking a strategic view of the market, of taking short-term losses in the pursuit of longer-term gains. The firm is uniquely positioned in the zinc market to act as a benign stabilizing element, keeping prices at a profitable but not demand-destructive level.

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It is clearly not as simple to regulate mine supply as it was oil supply for Saudi Arabia. You cannot turn off a mine like you can the spigot of a pump.

But with so many diverse zinc resources, Glencore is in a better position that any to smooth out the dips and peaks, for the sake of its shareholders and for the market as a whole.

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Aluminum industry officials restated a long-held stance that in the U.S. Department of Commerce’s Section 232 investigation into aluminum imports, China should be the primary focus of any trade action.

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During a roundtable conference Wednesday, Oct. 4, in Washington D.C., Michelle O’Neill, Alcoa’s senior vice president for global government affairs and sustainability (and newly elected chairwoman of the Aluminum Association); Ganesh Paneer, vice president and general manager of Automotive North America for Novelis; and Garney B. Scott, president and CEO of Scepter, answered questions about the state of the aluminum industry and outstanding trade legislation in the Department of Commerce.

O’Neill said the Aluminum Association will soon release a new statistical review of the aluminum market through 2016.

Citing shipment figures, O’Neill said overall demand is high, with shipments of aluminum from the U.S. and Canada up 40% from the trough of the recession in 2009 and “within striking distance “of record shipment numbers in 2005-2006. In that same vein, Paneer noted aluminum’s growing market share in the automotive market as another indicator of the versatile metal’s strength.

Despite these figures, however, the officials reiterated concerns about leveling the global trade playing field.

Scott, O’Neill’s predecessor as chairman of the Aluminum Association, said one of the Association’s biggest efforts is ensuring U.S. aluminum producers, recyclers and fabricators get to operate in a “predictable regulatory environment” and in a “rules-based global trading system internationally.”

In that vein, Scott referred to the levels of aluminum coming into the U.S.

“We continue to have a serious issue with the aluminum supply coming into the U.S.,” he said. “Last year saw record levels of imported aluminum into North America and more specifically the United States. The 13.1 billion pounds of imports accounted for more than half of U.S. supply.”

Scott further zeroed in on the problem, noting that while imports in general aren’t always a negative, the volume of imports from China continues to be a problem for the U.S. aluminum industry.

“While this industry has many responsible trading partners and does not view all imports as a problem, we do take issue when we see imports surg2ing from a country like China that operates outside the bounds of our global system of rules-based trade,” Scott said.

Imports from China have increased 200% since 2012, Scott said, and in the year to date are up 30%.

“These imports are a direct result of metal overcapacity,” he said.

He added that a negotiated agreement between the U.S. and Chinese governments is needed.

Recently, the Commerce Department opted to defer the issuance of a preliminary antidumping duty determination in its investigation of aluminum foil from China. Underpinning the deferral was a desire to incorporate information regarding the ongoing study of China’s non-market economy status. According to a Commerce Department release, rulings on China’s status and on aluminum foil will come no later than Nov. 30.

As for Section 232 — the administration’s investigation into the national security implications of aluminum (and steel) imports — there hasn’t been much chatter since the early summer, when an announcement appeared to be coming, but the administration’s self-imposed June deadline came and went.

“We’re in wait-and-see mode,” Scott said regarding the Section 232 investigation.

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According to the law, once a Section 232 investigation is launched, the secretary of commerce has 270 days to present findings and recommendations to the president, which makes for January deadlines for both the pending aluminum and steel investigations.

As for the ongoing talks geared toward renegotiating the 23-year-old North American Free Trade Agreement (NAFTA), Scott emphasized the industry’s trade ties with Mexico and Canada, adding that the industry isn’t looking for a “significant amount of changes” with respect to NAFTA.

Trade negotiators from the U.S., Canada and Mexico recently met in Ottawa in late September for a third round of negotiations focusing on NAFTA.