Market Analysis

An article in the Australian Financial Review (AFR) underlines the bullish narrative accompanying the iron ore price’s performance this year.

“Chinese steel consumption has just blown consensus out of the water this year,” the report notes, citing analyst comments, adding, “The macro backdrop, in terms of China, is very strong for all commodity consumption, and steel and iron ore is doing particularly well.”

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Rising money supply

The post points to rising money supply, which moved up 10.4% year over year in August, as a market-leading indicator of further strength in demand this year and iron ore producers’ relative underperformance relative to projections.

That is particularly true for Vale, which would need to achieve a run rate of close to 400 million tons per annum for the second half of the year to achieve its earlier production guidance of between 310 million and 330 million tons as a whole after a poor, COVID-impacted first half.

Source: Australian Financial Review

Iron ore price recovery

The recovery in iron ore prices has been impressive.

Dalian iron ore has risen more than 60% this year. The Singapore SGX benchmark has gained about 50%, underpinned by China’s strong demand, Reuters reported. China continues to ramp up steel output after rolling out infrastructure-led economic stimulus measures.

Source: Australian Financial Review

Relatively robust steel prices and a lack of significant inventory build despite record-high run rates supports a story of strong demand recovery. Meanwhile, the rising iron ore price provides support for steel prices. Margins remain constrained, meaning mills have little scope of overproduction if prices were to slide in an oversupplied market.

Source: Australian Financial Review

Iron ore takes a step back

Yet, prices have eased in recent days.

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stainless steel

Maksym Yemelyanov/Adobe Stock

The Stainless Monthly Metals Index (MMI) increased by 11.3% for this month’s index value, as stainless steel surcharges rose for a fourth consecutive month.

September 2020 Stainless MMI chart

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Stainless steel surcharges continue to increase

Stainless alloy surcharges are rising for the fourth month in a row.

Alloy surcharges for 304 in September will be $0.6231/lb, an increase of $0.0361/lb compared to August.

Over the past month, LME nickel prices increased approximately 12%, up to $15,442/mt by the end of August.

Chinese nickel price followed a similar trend, increasing to $17,590/mt (or CNY 120,750/mt).

U.S. demand recovery

Throughout July and August, the U.S. Department of Commerce reported the U.S. imported a total of 93,600 metric tons and 88,700 metric tons of all stainless products, respectively. The totals were twice as high as the year’s bottom of 46,800 metric tons back in May. Furthermore, the totals were much higher than the 2019 average of 64,600 metric tons.

Import levels reported match the expansionary track the U.S. has seen in the past four months.

August ISM PMI data came in at 56%, up 1.8 percentage points from July. Moreover, the ISM Manufacturing New Orders index came in at 67.6% in August compared to 61.5% in July.

Auto industry outlook

Besides consumer goods, the automotive industry is another major consumer of stainless steel.

As the U.S. presidential election approaches, both candidates have expressed their desire to boost the U.S. auto industry to create jobs.

A few particular differences could impact the price of stainless steel.

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steel mill production line

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The Raw Steels Monthly Metals Index (MMI) increased by 4.3% for this month’s value. 

September 2020 Raw Steels MMI chart

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U.S. steel prices start increasing

HRC prices increased by over 5.4% throughout August, closing at $486/st. During the first two weeks of September, the price rallied up to $521/st.

Meanwhile, Chinese HRC prices mostly traded sideways during August and the first two weeks of September.

The recovery of the U.S. auto industry might be driving the steel price increases.

U.S. auto production continued to improve. Producers such as General Motors, Ford and Fiat Chrysler ramped up their assembly plants.

However, supply has not quite caught up with demand. As such, U.S. auto inventory continues to tighten.

By the end of June, vehicle inventory fell to 2.6 million, or 33% fewer units year over year. Pundits suggest U.S. auto sales will reach an annualized 13.5 million unit rate for 2020, with stronger demand coming in 2021.

The aforementioned factors have not only supported the U.S. HRC price; HDG prices also surged.

The U.S. HDG price only increased by 5.6% throughout August, reaching $736/st, but found further support during the first two weeks of September. By the end of the second week of September, HDG broke resistance to $788/st.

Chinese steel market

After record imports in July, China’s iron ore imports in August fell 10.9%.

The General Administration of Customs reported China imported 100.36 million tons of iron ore throughout August, while consumers bought 112.65 million tons in July. However, imports increased 5.8% year over year.

According to Tang Binghua, of Founder CIFCO Futures, imports slowed in August partly due to port congestion from coronavirus-related restrictions. In addition, fewer shipments came from Australia as it closed its financial year.

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Chris Titze Imaging/Adobe Stock

The Renewables Monthly Metals Index (MMI) gained 4.2% for this month’s MMI value, as China’s cobalt stockpile leads this month’s report. (Editor’s Note: This report also includes coverage of grain-oriented electrical steel, or GOES.)

September 2020 Renewables MMI chart

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China looks to strengthen cobalt stockpile

Like countries around the world, China is also looking to strengthen its reserves of the strategic material cobalt.

According to Reuters, China’s National Food and Strategic Reserves Administration has issued a call to producers in the country to outline plans to sell the strategic material to the government.

As for the existing stockpile, Reuters cited cobalt industry sources who estimated China’s cobalt stockpile to be around 7,000 metric tons.

In terms of prices, LME cobalt price reached $33,000 per tonne Sept. 14, up just over 3% since the start of the year.

Tesla throws support behind Fair Cobalt Alliance

For automakers like Tesla, the cobalt market presents several risk factors, including supply shortages and, from a human rights perspective, questions regarding the ethics of cobalt mining.

A majority of the world’s cobalt is mined in the Democratic Republic of the Congo. Numerous NGOs have reported on the issues of child labor in the country’s mining sector, namely at small, “artisanal” mines.

As such, the automaker recently threw its support behind the Fair Cobalt Alliance, Teslarati reported.

“Our mission is to provide mining communities with access to the technical assistance, markets, capital and equipment that enable the building of diverse local economies through viable and thriving small- and medium-sized businesses,” the Fair Cobalt Alliance says on its website.

Earlier this year, Tesla reached a deal with Glencore through which the miner would supply the automaker with cobalt. This came even as the automaker has indicated it will eventually phase cobalt out of its supply chain.

Other members of the Fair Cobalt Alliance include Glencore, China’s Huayou Cobalt, Fairphone, Sono Motors and the Responsible Cobalt Initiative.

Tesla’s 2020 Annual Shareholder Meeting is scheduled for 1:30 p.m. PDT, Wednesday, Sept. 22.

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For buyers purchasing goods and materials from China, an unwelcome trend over the summer has been gradual gains in the Renminbi’s (RMB) strength.

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RMB gains against the dollar

The Chinese RMB has strengthened against the dollar in the region of 2.5% in the last four weeks, as the below graph from XE currency exchange firm shows. The RMB moved from 6.951 to 6.770 per dollar — equating to a stronger RMB, or weaker dollar.

RMB vs. U.S. dollar chart

Source: XE currency exchange

The RMB is forecast to strengthen further, according to JPMorgan (as reported by the Financial Times).

Ken Cheung, a strategist at Mizuho Bank, is quoted as saying the onshore RMB could rise further, supported by stronger consumer spending and a tightening labor market.

To what extent, though, is this RMB surge a result of a markedly improving economy? How much is down to just a weakening dollar — a phenomenon we have explored previously on MetalMiner — as a major driver of commodity price recovery over the summer?

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The Copper Monthly Metals Index (MMI) increased 5.1% for this month’s value, as copper prices continue to pick up globally.

September 2020 Copper MMI chart

LME copper prices increased throughout August, trading over $6,500/mt the last few weeks of the month. SHFE prices also increased during the same period, as local demand remained strong and refined production tightened.

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Copper prices pick up, find further support

LME copper prices declined for the first half of the month and, after increasing, traded sideways, moving from $6,439/mt at the end of July to $6,702/mt in August. The SHFE price followed a similar trend to the LME price. Both prices had not reached this level since June 2018.

Copper inventories in LME warehouses continued to decrease, closing at 89,350 tons. Stocks have not fallen to this low of a level since January 2006.

On the other hand, SHFE stocks had the exact opposite trend. SHFE stocks continued to increase throughout the month, rising to 170,086 tons this month. These trends have only accelerated in the first weeks of September.

Copper prices are partly driven by high Chinese demand. Consumption increased 14.9% year over year during the January to June period, up to 12 million tons.

Cuts on the supply side may have resulted in temporary fears in the market.

Chinese refinery capacity declined in recent months. Summer maintenance, along with concentrate supply tightening due to the pandemic, brought down refined production. Production fell by 5.3% to 814,000 tons in July, according to the National Bureau of Statistics.

China does not appear to be the only country producing less refined copper.

For example, Rio Tinto delayed the restart of its Kennecott mine in Utah due to maintenance.

Read more

The Aluminum Monthly Metals Index (MMI) increased by 2.4% for this month’s MMI value.

September 2020 Aluminum MMI chart

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SHFE, LME arbitrage

LME and SHFE aluminum prices traded sideways this past month.

The LME price reached $1,818/mt on Sept. 1, a level it had not reached since January 2020.

Meanwhile, the SHFE price reached CNY 14,960/mt on Aug. 24. However, the SHFE aluminum prices continued to move higher than the LME price.

Throughout the month, SHFE prices were approximately $360/mt to $415/mt higher than the LME price. Some of the arbitrage has occurred due to the weakening of the U.S. dollar, which makes the Chinese price appear higher.

Chinese imports remain high

The price arbitrage between the LME and the SHFE continues.

China became a net importer for the first time in July. The country imported 440,000 tons in July, according to the General Administration of Customs.

July imports rose by 35.5% from the previous month and by 570% from July 2019.

The arbitrage and increase of aluminum imports in China led to the decline of LME warehouse stocks to 1.55 million tons by the end of the month.

On the other hand, Chinese exports are down 11% from August 2019 (despite a slight increase in August). However, exports reached a four-month high at 395,424 tons. The downtrend is mostly due to weak demand overseas, as most countries are still in the early recovery phases of the coronavirus pandemic, while China seems to be ahead.

Read more

copper mine

vadiml/Adobe Stock

A fair part of the bull story for copper this year has been supply-side fears.

The world’s largest mines are in South America, which has suffered from catastrophic levels of coronavirus infections. True, China’s recovery has played a role in the booster’s case. So have the role of copper in the growing electric vehicle (EV) market and the weakening U.S. dollar, which has lifted all commodities.

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Copper outperforms other metals, including aluminum

But just comparing copper to aluminum, the latter lifted only in proportion to the weakening dollar. Meanwhile, copper has risen from March lows much more.

From April to date, aluminum has jumped some 20%, largely as a result of a weakening dollar and recovering Chinese demand sucking in imports.

But copper has risen some 33%, driven by the same dynamics but with the added anxiety of supply-side risks from major suppliers in South America.

Coronavirus crisis in Peru, world’s No. 2 copper producer

Adjusting for population size, two of the countries hardest hit my infections in the world have been Peru and Ecuador. Both countries have seen more than 1,000 excess deaths per million inhabitants.

The two Latin American countries also have the highest excess percentage — excess deaths expressed as a share of normal deaths for the same period — suggesting the impact on their economies, health care systems and working practices may be even more severe than the official statistics suggest.

Developing economies like Peru cannot afford prolonged or repeated lockdowns. Like India, South Africa and many other countries, containment is at best local and at worst nonexistent.

Read more

After dipping two weeks ago, the U.S. steel sector’s capacity utilization rate for the week ending Sept. 5 bounced back.

Steel mills produced at a rate of 63.7% during the week ending Sept. 5, 2020, according to the American Iron and Steel Institute (AISI). The rate marked an increase from the 61.7% recorded the prior week (when it had fallen from 63.0% the week before that).

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Production hits 1.43M tons

Steel output for the week ending Sept. 5 totaled 1.43 million net tons.

The weekly production total marked a 21.2% decline compared to the week ending Sept. 5, 2019, when capacity utilization reached 78.0%.

Meanwhile, production last week marked a 3.3% increase from the week ending Aug. 29.

Year-to-date output down by one-fifth

Buoyed in part by a recovery in automotive demand, the steel capacity utilization rate has made gains in recent months.

However, for the year to date, the capacity rate and overall output remain down compared to 2019 levels.

Year-to-date steel output totaled 53.27 million net tons, down from 66.73 million net tons for the same period in 2019. The capacity utilization rate for the same period last year reached 80.6%.

Read more

India aluminum

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The Indian aluminum sector, which once stood firmly on the path of growth, today finds itself buffeted by the winds of uncertainty because of the COVID-19 pandemic.

Industry leaders have suggested many measures to the India government to put the sector back on track.

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Indian aluminum sector calls for removal of export cap

Uppermost on the list is a request to allow an export scheme for aluminum without any cap on the total exports.

The Engineering Export Promotion Council (EEPC) of India recently wrote to the Commerce Minister to continue with the Merchandise Export from India Scheme (MEIS Scheme) without any limit on the aluminum exports. The change would help the sector survive the current crisis situation, the Council argues.

Floated last year, the government trimmed the MEIS in the fiscal relief package recently extended to exporters. The government found it “unsustainable.”

The view is that, in general, the MEIS had failed to boost exports and capture new markets.

Critics argue MEIS cut hurts Indian aluminum sector

But experts, like Economics Affairs Secretary R. Gopalan, beg to differ.

Writing in the Financial Express, Gopalan said shrinking the MEIS had hurt the Indian aluminum industry, as the industry had to continue to rely on exports because of weak domestic demand. As such, so, the government had to support aluminum exports.

The only option left for the industry to sustain itself in these times of the pandemic is to export aluminum products, Gopalan said. As such, the decision to suddenly stop the MEIS, he felt, could have “a debilitating impact” on exporters’ ability to survive under current difficult conditions. Gopalan felt it would hurt exporters that work on long-term contracts.

Indian aluminum is one of the high-growth areas which could propel the nation’s GDP. However, the COVID-19 pandemic has already affected India’s aluminum exports. Export values declined 11% from U.S. $5.7 billion in fiscal year 2019 to U.S. $5 billion in fiscal year 2020. The new directive with regard to MEIS would render aluminum exports vulnerable and uncompetitive.

Mining group calls for import curbs

In parallel, the Federation of Indian Mineral Industries (FIMI) has urged the government to curb aluminum imports. Furthermore, the federation asked the government to facilitate the “tapping of rich and almost inexhaustible” domestic resources by local players.

Despite robust domestic demand and sufficient domestic aluminum capacity, India imported 60% of the aluminum it consumed. The result of this forex outgo, according to Vice-president R.L. Mohanty.

Domestic primary aluminum producers — such as Hindalco Industries and the Anil Agarwal-led Vedanta Ltd — are already working with the government at three levels: primary aluminum, scrap and downstream products. They have been asking the government to implement remedial measures, such as anti-dumping and anti-subsidy duties, the Business Standard reported.

Hindalco, the world’s largest aluminum rolled products manufacturer (especially in beverage cans and auto body), recently acquired Aleris. With this move, the company can now produce aerospace-grade aluminum sheets. It is also focusing on building capability in India to be part of the India growth story.

Meeting future aluminum demand

Domestic consumption of aluminum is expected to reach 10 million tons by fiscal year 2031-2032. To meet this future demand, India needs to increase bauxite production from 23 million tons in fiscal year 2019 to approximately 70 million tons by that time. Alumina production would have to rise from 7.4 million tons to 20 million tons.

India is No. 2 in the world in aluminum capacity. The country has primary aluminum capacity of 4.1 million tons per year and downstream processing capacity of 3.9 million tons.

Recently, the aluminum industry had made huge investments to increase domestic production capacity from 2 million tons per year to 4.1 million tons per year.

But experts fear that the COVID-19 crisis, coupled with the new government policies, could derail this growth story.

See why technical analysis is a superior forecasting methodology over fundamental analysis and why it matters for your aluminum buy.