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Aluminum firm Alcoa Corporation reported its second-quarter earnings Wednesday, with some numbers showing the impact of current market trends and forces.

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The Pittsburgh-based firm reported $3.6 billion in Q2 revenue and $904 in adjusted earnings before interest, tax, depreciation and amortization (EBITDA). The firm’s Q2 EBITDA marked a 34% increase from Q1’s $653 million.

“Higher alumina and aluminum prices, as well as a stronger U.S. dollar, were the primary factors driving this sequential increase,” Alcoa’s Q2 earnings report states. “Somewhat offsetting these factors were unfavorable mix and higher costs for energy, raw materials, and maintenance activities.”

However, the firm downgraded its annual EBITDA forecast from $3.5 billion and $3.7 billion down to between $3.0 billion and $3.2 billion “due to current market prices and other factors.”

“Market pricing continued to be favorable in the second quarter and drove a 38 percent sequential increase in adjusted EBITDA excluding special items,” Alcoa President and CEO Roy Harvey said. “These market tailwinds also facilitated greater progress on our strategic priorities to reduce complexity in our Company, drive returns from our assets, and address pension liabilities to strengthen the balance sheet for the long-term.”

The firm attributed the lower forecast to “current market prices, tariffs on imported aluminum, increased energy costs, and some operational impacts.”

“While markets and trade dynamics are likely to remain fluid, we will continue to be focused on driving value for our stockholders through all market cycles,” Harvey added.

On the operations side, Alcoa reported that the third potline at its Warrick Operations in India will be restarted by the end of the year. Two of three potlines were restarted, and the third line due for a restart was shut down in May due to a power outage.

Alcoa estimates the restart of the third potline during the second half of the year to cost an estimated $5 million. In addition, once the partial restart schedule is completed at Warrick, the company estimates the smelter’s annual operating capacity will be 161,000 metric tons.

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Alcoa closed Wednesday at $47.96/share on the New York Stock Exchange. The stock’s 52-week high came on April 18 ($62.35), buoyed by the then still relatively new Section 232 tariff on aluminum (and steel).

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Cobalt is a product we don’t often talk about, partly because of its relative scarcity but also because of the specificity of its industrial application.

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With that said, the industries it does draw interest from are high-profile ones, including the growing electric vehicle (EV) sector.

Given cobalt’s relative scarcity and the sometimes volatile state of its supply chains, even small shifts in supply can have massive impacts. According to a report by S&P Global Market Intelligence, global mined cobalt production in 2017 fell to 115,071 tons from 116,272 tons in 2016. Much of the drop came as a result of halted operations at the Lububashi Slag Hill operation in the Democratic Republic of the Congo (DRC).

A majority of the world’s cobalt is mined in the DRC (at 60.5% in 2017), meaning the cobalt price is subject, in many cases, to the political instability of the country, often leading to production stoppages.

According to the the Herfindahl-Hirschmann Index (HHI), which helps to assess the level of competition between companies in an industry, the cobalt sector is, unsurprisingly, very concentrated.

According to the S&P report, a reading greater than 0.25 indicates a concentrated market. As of 2009, the cobalt HHI stood at approximately 0.25 and, in the ensuing years, has risen to approximately 0.38 in 2017.

Per the report, that market concentration is likely to increase in the coming years, as the S&P report claims there is “very little likelihood that the DRC will cease to be the most important source of cobalt globally.”

Outside of the DRC, the S&P report indicates cobalt production has increased at Vale’s Voisey’s Bay operation in Canada. As we recently noted, Vale inked a deal with two Canadian companies worth a total of $690 million. That, combined with the approval of an underground mine at Voisey’s Bay, will provide a “significant source” of cobalt from outside of the DRC, with the mine life possibly extending into the 2030s, the S&P report states.

As for political considerations, elections in the DRC are scheduled for the end of 2018. The country has been entrenched in a state of political limbo after President Joseph Kabila refused to step down at the end of 2016 (the end of his mandate). Kabila assumed power in 2001 shortly after the assassination of his father, Laurent-Désiré Kabila, and was elected in 2006 and re-elected in 2011.

According to the S&P analysis, post-2016 unrest “has not had a significant effect on the historically restive Lualaba and Haut-Katanga provinces hosting the Roan copper-cobalt belt,” but that there has been “lingering concern that the violence and disturbance could spread throughout the country.”

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Large multinational miners have still, nonetheless, looked to cash in on the country’s cobalt reserves, despite the challenges to the business environment posed by political instability. In addition, miners have attempted to grapple with a revamped mining code, signed into law by President Kabila in April. The new code calls for higher royalties due to the government from minerals sales. With respect to cobalt, the revamped code called for a royalty increase to 10% (up from 2%).

Never let it be said that metals markets are not dynamic (and I am not talking about metals prices).

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After the financial crisis, the one area of the market that was making money was the stock and trade financiers, plus the warehouse companies on whom they depended for safe storage. In 2010, Goldman Sachs bought Metro for some $450 million and proceeded to cream the market as inventory swelled to record levels. Stuck behind massive load-out queues, warehouse companies pulled in guaranteed rents.

But following implementation of strict LILO and queue-based rent capping (QBRC) rules by the LME, queues ran down and, maybe coincidentally (do you believe that?), the grey market stock and finance firms exited the LME warehouse system in droves.

According to FastMarkets, total stocks in LME-listed warehouses are currently just above 2.5 million metric tons, down from their peak of 7.6 million tons back in July 2013 (before the warehousing reforms were bought in). In Europe, the total area allocated for LME metals storage sheds dropped by 18% from June 2017 to 2018, down to 1,747,114 square meters. Previously, Glencore dominated Vlissingen, more than half of warehousing space has gone in the past year.

The situation is arguably even more brutal in Asia.

Busan in South Korea, plus Malaysia and Singapore — locations that all expanded rapidly a few years ago — have seen volumes collapse.

In Singapore — home to most LME aluminum metals in Asia, according to FastMarkets — live aluminum stocks have plunged by half to 91,725 tons over the last year, while Busan has seen a 71.8% drop in aluminum from a year ago and a 66.6% drop in copper.

It could be tempting to brand firms exiting the market to rats abandoning a sinking ship — but who can blame them?

With falling volumes, it is proving tough to turn a profit.

Noble sold out to Australian and Singapore investors in early 2017 and its Worldwide Warehouse Solutions (WWS) has now gone bankrupt, while Katoen Natie of Singapore has closed its LME operations in Asia following irregularities. Henry Bath, a firm that has seen markets rise, fall and rise again over more than 200 years of trading, and will likely ride out these trials, has taken over their sheds.

Warehouse companies put the swift decline in margins down to a fall in volumes and the exodus of the stock and finance trade. LME stocks of aluminum at 1.145 million tons have returned to where they were before the financial crisis.

According to CRU data quoted by Reuters, shadow stocks held off warrant but often in the same warehouses as LME stocks have fallen from 10 million tons at the start of 2016 to just over 6 million tons at the end of Q2, and are still falling. That is a massive loss of revenue for storage firms and in part explains why the big names, both in warehousing and finance, saw the writing on the wall and got out in recent years.

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So, this is an industry that is maybe not in crisis, but is certainly facing challenges and radical change.

Who would have thought wind’s transformation from subsidy-supported to self-financing power source would happen so quickly – not this publication, that’s for sure.

Apart from diehard environmentalists, most consumers have been opposed to renewables on the basis they cost significantly more and turbines are an eyesore on the landscape.

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But in the span of less than 10 years, public opposition has declined. Opposition has not gone away entirely, but it has softened as we have become more familiar with the sight of slowly rotating turbine blades on the horizon and with the realization that its costs are falling dramatically.

A recent article in The Telegraph reports on how the cost of power production from onshore wind farms has dropped so far it undercuts conventional coal, natural gas and nuclear options.

The below graph from 2015 shows onshore wind as the cheapest option; costs have come down further since then.

Source: Wikipedia

Calling it the “subsidy-free revolution,” the Telegraph article reflects our own surprise at how quickly the change has taken place.

To be fair, offshore power still requires some subsidy because of the greater cost of installation and maintenance. Even here, costs continue to fall and subsidy is a route the authorities prefer to entertain because of public opposition to what was seen as the blight of onshore turbines dotting the landscape.

In large part, this is because turbine sizes have increased and, as a result, efficiencies have increased.

Source: The Telegraph

The industry is seeing it as a major investment opportunity, generating jobs while at the same time reducing the country’s overall carbon emissions.

A figure of £20 billion covering both onshore wind and solar over the next 10 years is mooted, all of which would be subsidy-free.

The latest figures are sounding the death knell for nuclear power in the U.K., but as usual the government hasn’t caught up with the numbers.

Nuclear power is costing a massive £92.50 per megawatt hour and is partly justified on the basis that a base load of power is always required to fill in renewables variability.

However, battery parks like Glassenbury in Kent are springing up that can meet gaps in demand, but nothing like a 2 GW nuclear power plant; still, a few MW here and there is slowly adding up.

But, like renewables, costs will need to come down for investment to flow into battery parks. That is, they’ll need to come down to the extent required to negate the need for quick fireup of conventional power sources to fill in gaps during cold snaps or, as renewables rise, as a percentage of the whole to fill in for periods of low wind or at night for solar.

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Still, a low-carbon future, at lower power costs and with the benefit of economic growth from investments – what’s not to like?

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

Last week, the U.S. Department of Commerce announced it had launched anti-dumping (AD) and countervailing duty investigations of steel rack imports from China.

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The alleged dumping margins in the AD case are 130.0-144.5%, according to a DOC release.

The DOC added there 28 alleged subsidy programs for steel racks, “including five preferential loan and interest rate programs, one debt-to-equity swap program, six income tax and other direct subsidy programs, two indirect tax programs, seven less than adequate remuneration (LTAR) programs, as well as seven grant programs.”

The petition in the case was filed by the Coalition for Fair Rack Imports, which estimates that imports of steel racks in 2017 were valued at approximately $200 million.

Products covered in the investigation includes “steel racks and parts thereof, assembled, to any extent, or unassembled, including but not limited to, vertical components (e.g., uprights, posts, or columns), horizontal or diagonal components (e.g., arms or beams), braces, frames, locking devices (i.e., end plates and beam connectors), and accessories (including, but not limited to, rails, skid channels, skid rails, drum/coil beds, fork clearance bars, pallet supports, column and post protectors, end row and end aisle protectors, corner guards, row spacers, and wall ties).”

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The U.S. International Trade Commission is scheduled to make a preliminary ruling by Aug. 6, with the DOC following suit Sept. 13.

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The U.S. and India are scheduled to sit across the table this week in Geneva to discuss the case filed by India with the World Trade Organization’s (WTO) dispute settlement mechanism over the U.S.’s imposition of import duties on steel and aluminum.

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The talks will be held under the aegis of WTO’s dispute settlement mechanism, according to a news report by the Press Trust of India.

India is part of the group of nations — which includes China, Russia and Norway, among others — to have filed separate dispute claims on the topic with the WTO. The meeting is part of the consultations the U.S. will be holding with all such countries on July 19-20.

It may be recalled that the U.S. had imposed a 25% tariff on steel and a 10% tariff on aluminum imports from India. India’s exports of the two commodities to the U.S. stands at about U.S. $1.5 billion per annum. India had initially tried to raise the issue with the U.S., and then informally with the WTO, calling the move an “abuse of global trade provisions that could spiral into a trade war,” — sentiments similar to the one expressed by India’s neighbor, China.

In May, India dragged the U.S. to the WTO dispute settlement mechanism over the imposition of import duties.

Consultation is the first step of the dispute settlement process. Incidentally, both the countries are already involved in disputes at the global trade body in the areas of poultry, solar, and export subsidies, to name a few.

According to another news report, senior trade officials of India and the U.S. will meet later this month in Washington to conclude negotiations on a “mutually-acceptable trade package.” Quoting an unnamed official source, it said the meeting comes amid an escalation of the global trade war.

Since India’s proposed additional tariff worth U.S. $235 million on 29 U.S. goods — including almonds and apples — are retaliatory in nature, any rollback of the additional duty on Indian steel and aluminum by the U.S. will lead to a withdrawal of corresponding taxes by the Indian Government on U.S. goods, too.

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The U.S. sees good prospects for its companies in the Indian civil aviation, oil and gas, education service, and agriculture segments.

It was another busy month in the world of metals.

Then again, these days quiet months in metals or in trade, generally, are few and far between.

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Trade tensions continued to rise, as $34 billion in tariffs on Chinese goods went into effect (China responded in kind), and an additional $16 billion in tariffs are under review. This week, President Donald Trump announced the intention to impose an additional $200 billion in tariffs on China, ratcheting up the stakes even further.

Meanwhile, a Section 232 investigation focusing on imports of automobiles and automotive components is unfolding. More than 2,300 public comments were submitted as part of the U.S. Department of Commerce’s review process, and public hearings are scheduled for next week.

Meanwhile, in metals markets, most base metals were down last month, with steel being the exception.

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A few highlights from this month’s round of Monthly Metal Index (MMI) reports:

  • Since peaking at $7,316/mt in June, the LME copper price dropped 12%.
  • The subindex for grain-oriented electrical steel was the only MMI to post an increase on the month.
  • The U.S. silver price hit its lowest level since January 2017, while U.S. gold bullion dropped to a one-year low.
  • Aluminum prices were also part of the general downtrend, as prices continued to move away from this year’s April peak (after Russian companies and their owners, including aluminum giant Rusal, were slapped with sanctions by the U.S.).

Read about all of the above and much more by downloading the July MMI report below.

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Here’s What Happened

MetalMiner’s Global Precious Monthly Metals Index (MMI), tracking a basket of precious metals from across the globe, dropped four points (a loss of 4.5%) for the June reading after holding flat for three straight months.

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Incidentally, the July 2018 MMI value hit its lowest point since exactly one year ago, when it last clocked in at 84.

Individual price points within this precious metals basket hit some historic lows as well.

The U.S. silver price hit $16.09 per ounce for the July 1 reading, the lowest since January 2017 (when it took an anomalous dip down to $15.80 for one month before bouncing back up). U.S. gold bullion has languished back down to the mid-$1,200s, a one-year low.

And both platinum and palladium have come off considerably, with the U.S. bar price of the former dipping below $900 per ounce for the first time since February 2016.

What Buyers Should Consider

  • Keep an eye on the U.S. dollar. A stronger dollar of late, which had gotten a bump from recent better-than-expected U.S. manufacturing data at the beginning of the month, pressures platinum prices because “it makes greenback-priced precious metals more expensive for holders of other currencies,” according to Reuters.
  • Gold is also in the crosshairs of a stronger dollar. In fact, that has become “the biggest obstacle” for gold prices in the near and long term, according to a recent JP Morgan price forecast report cited by Kitco.
  • The threat of auto tariffs has also burned platinum pricing. Due to the pricey PGM’s use in diesel engines, “the threat of protectionist policies has fueled bets that slower trade activity will disrupt the global economy, reducing commodity consumption” — including that of platinum in cars, according to the Wall Street Journal (paywall).

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While the product contains trace amounts, at best, of gold’s shiny, less expensive cousin — not to mention that it’s fake — Alexa Silver is still pretty hilarious.

The collapse of iron ore prices in the face of oversupply has been threatened for the last few years.

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Following massive investments in Australia and Brazil, oversupply was expected to hit dwindling demand on the back of a cooling Chinese property market and an environmental crackdown on excess steel production.

Yet despite repeated dire warnings, prices have, if anything, gone the other way, rising to over $67 per ton during May and only falling back during the following month.

Finally, it seems gravity is reasserting itself and prices are beginning to ease.

While oversupply has not manifested itself as a flood, producers have shown remarkable market discipline, and it has meant ample margins remove one barrier to producers following the market down.

In part, Chinese efforts to reduce excess capacity have supported steel prices by supporting finished steel prices and, hence, steel producers’ margins, rather than impact iron ore demand. A focus on pollution has boosted demand for higher-grade iron ore, supporting prices for the highest purity Australian and Brazilian grades and reducing demand for lower-grade material produced in India, Africa and Iran.

According to Reuters, constraints on steel producers have tightened the domestic steel market and demands that steel companies and coke producers meet ultra-low emissions targets has further supported prices for top-grade material.

Spot ore with 62% content delivered to north China was at $63.85 a ton, according to Mysteel.com. But prices have lost ground of late, with further expectations for an easing in prices by the end of the year coming amid signals China is cooling off.

Fears over the effects of a trade war with America have not only hit the stock market.

A combination of cooling demand as debt tightens and new supply in Brazil and Australia has to find a home and will, it is believed, drive down prices for both steel products and iron ore. Iron ore may get dragged lower in the second half as global mine supply expands, steel prices ease off, and renewed production curbs at mills in China blunt overall demand.

Prices may drop to $60/mt in the next quarter and $55 in the fourth, according to Sun Feng, senior ferrous metals analyst at Orient Futures Co, who has more than a decade of experience tracking the market, as quoted in the Gulf Times.

CRU Group also sees a slight fall, with prices bottoming just below $60 in October or November.

“The outlook of iron ore prices is not rosy, particularly in the fourth quarter,” Sun was quoted as saying.

The death of iron ore has been predicted many times over the last few years. However, a combination of higher-than-expected demand and market discipline by suppliers has kept prices relatively buoyant.

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Nonetheless, it does seem as if the stars are aligned now for a fall.

The Stainless Steel Monthly Metals Index (MMI) fell slightly this month, down to 82 from 84.

Despite the fall in the Stainless Steel MMI, the index remains at February 2015 highs.

The index dropped due to a slight decrease in LME nickel prices in June. However, stainless steel surcharges inched higher again this month, remaining in a strong uptrend.

LME Nickel

In June, nickel price momentum slowed down slightly. However, the short-term slide in June came as a result of a general downtrend in base metals. LME nickel prices remain in a long-term uptrend since June 2017.

Nickel long-term prices. Source: MetalMiner analysis of FastMarkets

Buying organizations can expect higher prices in the coming months.

MetalMiner previously recommended buying some volume forward. Given the current uncertainty in the steel and stainless industries, nickel prices remain supported for the short term.

A fundamental tightness in the nickel market has also added support to the latest nickel price increases.

President Rodrigo Duterte of the Philippines announced a possible halt to mining in the country due to environmental damage. In June, 23 out of 27 mines passed an environmental review, easing the uncertainty of supply. However, nickel supply uncertainty still remains as a result of environmental measures.

Domestic Stainless Steel Market

Following the recovery in stainless steel momentum, domestic stainless steel surcharges increased again this month.

The 316/316L-coil NAS surcharge reached $1.06/pound, while the 304/304L went up to $0.7698.

Source: MetalMiner data from MetalMiner IndX(™)

The pace of stainless steel surcharge increases appears to have recovered its previous level again this month. Stainless steel surcharges remain in a clear uptrend and appear well above 2015-2017 lows.

What This Means for Industrial Buyers

Stainless steel momentum slowed down slightly this month. However, both steel and nickel remain in a bull market. Therefore, buying organizations may want to follow the market closely for opportunities to buy on the dips.

To understand how to adapt buying strategies to your specific needs on a monthly basis, take a free trial to our Monthly Outlook now.

Actual Stainless Steel Prices and Trends

Chinese 304 stainless steel coil prices fell this month by 5.91%, while Chinese 316 stainless steel coil prices fell by 4.98%.

Chinese Ferrochrome prices decreased this month by 1% to $1,970/mt. Nickel prices fell 1.38% to $15,000/mt.