Market Analysis

cars on the road in Shanghai, China

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Just about every review of growth in China — of steel prices or of iron ore demand — contains reference to China’s property market.

Few countries in the world have a property sector that plays such a large and dynamic role in the country’s GDP. Furthermore, few have one that causes such concern among a minority of economists that obsess over the risks the sector poses.

So, a detailed analysis in The Economist is a welcome insight into the scale and scope of the market that underlines why it is such a significant driver of not just GDP but raw material prices and seaborne trade.

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China’s property market and its massive scope

To cite The Economist, every year China starts building about 15 million new homes.

That’s more than quintuple the number in America and Europe combined.

The property sector, both the direct impact of all the construction and its indirect effect on everything from concrete to curtains, accounts for a quarter of China’s GDP. That explains: a) why a runaway property market is such a driver of growth and b) why Beijing is at such pains to progressively control the market. Left unchecked, it poses a huge potential risk.

Chinese real-estate developers are on the hook for more than $100 billion in bond repayments during 2021 alone, according to Moody’s. For the world as a whole, roughly one-tenth of outstanding bank loans to non-financial clients has gone to China’s property sector, whether as financing for developers or mortgages for homebuyers.

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China story steel production

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After global crude steel production rose for four consecutive years, output declined last year, the World Steel Association reported Tuesday.

Global crude steel production drops 0.9% in 2020

Global crude steel production fell by 0.9% in 2020 compared with 2019, the World Steel Association reported.

Production had increased every year from 2015-2019.

Output last year totaled 1.86 billion tons, down from 1.88 billion tons in 2019.

Mirroring its economic recovery compared with the rest of the world, China’s steel production remained strong compared with the rest of the world. China’s output rose from 1.0 billion tons in 2019 to 1.05 billion tons in 2020.

As such, China’s share of global output jumped from 53.3% to 56.5%.

India and Japan, the No. 2 and No. 3 steel producers, respectively, both saw their output decline in 2020. India’s fell by 10.6%, while Japan’s dropped by 16.2%.

Among the top 10 steel producers in the world, only China, Russia, Turkey and Iran posted year-over-year growth.

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

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rare earths

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In a rare example of joined up governmental thinking, the announcement by Pensana Rare Earths that it has submitted a planning application for a $125 million rare earth oxide refining facility. The facility would be near Hull in northeast England and would plug a gap in an ore-to-finished-turbine manufacturing landscape developing rapidly in the U.K.’s northeast.

U.K.’s rare-earths-to-turbine supply chain

In November, Innovate UK, a government agency, awarded funding in November to Less Common Metals (LCM), a rare earth alloys producer. The funding is aimed at conducting a feasibility study into establishing a fully integrated supply chain for rare earth permanent magnet production in the U.K.

The sense of momentum is already palpable.

Pensana would produce rare earth oxides used to manufacture the powerful magnets that drive the motors of offshore wind turbines and electric vehicles. The firm cites the proximity of one of the world’s largest offshore wind farms at Dogger Bank as an attraction.

However, in reality it is the turbine factory GE has proposed that is the real draw.

Metaphorically sitting in between Pensana and GE’s turbine plant would be LCM based in Ellesmere Port near Liverpool and the only rare earth magnet alloy producer in Europe, according to the Financial Times. Encouraged by the U.K. government’s Innovate UK, LCM is also moving into metal production. It would no doubt welcome a domestic raw material supplier and a turbine customer, both nearby.

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earnings sign

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This morning in metals news: Cleveland-Cliffs released its preliminary Q4 2020 results; demand for sustainable aluminum is rising in the maritime industry; and U.S. steel prices continue to rise.

Cleveland-Cliffs revenue jumps

Cleveland-Cliffs reported Q4 2020 revenues of approximately $2.2 billion to $2.3 billion.

The total marked a 320% year-over-year jump.

Meanwhile, the firm reported EBITDA of $280 million to $290 million, or up 150% year over year.

Furthermore, the firm tallied steel sales volume of 1.9 million net tons.

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Demand for sustainable aluminum

Oslo-based Norsk Hydro explained that demand for sustainable aluminum products in the maritime industry is on the rise.

“We see the maritime industry has increased its focus on sustainable products, material selection and design in recent years,” said Thomas B. Svendsen, market manager in Hydro. “Electric ferries carry heavy batteries and need lighter materials. The CO2 footprint in the industry needs to be reduced and recycling of material has therefore gained traction. Aluminium is a good fit.”

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copper coils stacked

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China has had a fraction of the deaths and hospitalizations from the COVID-19 pandemic that Western societies have had. Furthermore, China had an economic bounceback that saw its GDP rise 2.3% last year.

China’s bounceback

The rebound has been impressive.

Construction of new high-speed train lines to smaller provincial cities and new motorways connecting remote cities left behind in previous plans in part drove the recovery.

The housing sector has also boomed. Overseas demand has boosted manufacturing, particularly PPE and electronic goods, even as other exporters have suffered by lockdowns in those markets.

In the longer term, further debt and a swing back to manufacturing from the earlier pivot to consumption will not do the economy or China any good.

For now, however, the economy is humming. Tailwinds from both stimulus and pent-up savings should keep the economy growing strongly in the first half of 2021.

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London Metal Exchange

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Steel is the world’s second-largest commodity after crude oil. It is 15 times the size of all other metals markets combined in terms of metric tons. Furthermore, it is worth twice their value.

Yet, until recently, it was an industry that saw little use for a futures market. That is primarily because major steel participants enjoyed stable long-term prices for the materials they needed.

Price material volatility

Prices for iron ore and coking coal, two of the essential raw materials for steel production, have become far more volatile in recent years. That volatility has sent price shocks rippling through the supply chain. In turn, it has created volatility in finished steel prices that consumers are desperate to contain.

Enter the major futures exchanges. For over 200 years, the London Metal Exchange (LME) has provided the trade – producers, traders and consumers – the opportunity to hedge their risk across a growing range of base metals.

However, only recently have exchanges such as the LME, the U.S.’s CME and the Shanghai Futures Exchange (SHFE) in China introduced products allowing the trade to hedge raw material and finished steel price risk.

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The Stainless Monthly Metals Index (MMI) increased by 6.0% this month, as ATI issued a major announcement and China ups its stainless imports from Indonesia.

January 2021 Stainless MMI chart

ATI exits stainless steel commodity market products

Allegheny Technologies Incorporated (ATI) announced Dec. 2 that the company would exit the standard stainless sheet product market. The move reduces availability of standard 36″ and 48″ wide material.

The announcement comes as part of the company’s new business strategy. ATI will focus on investing in enhanced capabilities on higher-margin products, primarily in the aerospace and defense industries.

ATI’s departure from the stainless steel commodity portion of the market also leaves a gap for 201 series materials, which is why 201 base prices will see bigger increases than 300 or 430 series materials. Both NAS and Outokumpu announced a 201 base price increase amounting to approximately $0.0500/lb.

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

China increases Indonesia imports

Meanwhile, according to data reported by the World Bureau of Metal Statistics (WBMS), Indonesia increased its stainless steel product exports by 23.1% from 2019 to 2020.

Slab exports increased from 249,600 metric tons to 973,800 metric tons. Meanwhile, coil exports decreased from 1.5 million metric tons to 1.1 million metric tons.

During 2019, Taiwan finished as the largest consumer of Indonesian stainless steel exports, followed by China.

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The Raw Steels Monthly Metals Index (MMI) increased by 16.5% this month, as steel prices showed strength in December.

January 2021 Raw Steels MMI chart

U.S. steel events

The American Iron and Steel Institute, the Steel Manufacturers Association, the United Steelworkers union, the Committee on Pipe and Tube Imports and the American Institute of Steel Construction sent a letter to Joe Biden urging him to keep the 25% national security tariffs on steel imports that were imposed in 2018.

The industry groups emphasized that the tariffs are essential “to ensure the viability of the domestic steel industry in the face of this massive and growing excess steel capacity.”

“Removing or weakening of these measures before major steel producing countries eliminate their overcapacity — and the subsidies and other trade-distorting policies that have fueled the steel crisis — will only invite a new surge in imports with devastating effects to domestic steel producers and their workers,” the letter continued.

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The Copper Monthly Metals Index (MMI) increased 3.3% this month, as copper producers have faced challenges that are impacting supply.

January 2021 Copper MMI chart

After a slow December, copper prices continued to increase the first week of January. Prices surpassed the $8,000/mt mark.

However, copper prices remain volatile. As the pandemic continues to develop, the U.S. dollar remains around 90, future demand is uncertain and supply is strained.

Supply constraints from copper producers

Major copper producers are experiencing supply constraints.

On Christmas Eve, MMG declared force majeure on its Las Bambas copper mine in Peru as the local community continued to block a nearby road in protest, making it impossible for the company to transport its concentrate to the port to be shipped. The blockage started Dec. 12, but production continued.

Las Bambas represents approximately 2% of global copper production.

Meanwhile, on Jan. 4 the Mongolian Government informed Rio Tinto — through the miner’s partly-owned subsidiary Turquoise Hill Resources — that if the Oyu Tolgoi underground expansion did not prove to be more profitable, it would terminate their 2015 agreement on fiscal terms.

The expansion would make Oyu Tolgoi the fourth-largest mine in the world by 2030. As such, a shutdown would represent a significant supply disruption.

Large disruptions mean supply constraints, which in the long term support prices even more.

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Low TC/RCs

Members of the China Smelters Purchase Team (CSPT) lowered treatment and refining charges to $53 per tonne and 5.3 cents per pound for the first quarter of 2021. These charges represented a 8.6% cut compared to the previous quarter.

Similarly, the annual TC/RC benchmark, set by Chinese smelters and Freeport-McMoRan, declined for the sixth consecutive year. The benchmark settled in at $59.50 a tonne and 5.95 cents per pound.

The TC/RC declines come as no surprise.

Mine supply remains tight (as mentioned above). Furthermore, smelting capacity continues to increase, particularly in China. This mix forced smelters to accept lower charges in order to secure raw material.

TC/RCs are a good indicator of raw material available in the market. When primary material is widely available, TCs go up. Meanwhile, when primary material is scarce, smelters lower their TCs. This can affect market sentiment and, ultimately, the price.

Copper scrap

Goldman Sachs reported 2021 could mark the beginning of a copper price supercycle due to the skyrocketing demand boost that the economic recovery might trigger.

As previously mentioned, supply might be tight in the following years. However, scrap might be able to offset supply constraints for at least a year.

ED&F Man Capital Markets’s analyst Ed Meir reported that in previous supercycles, scrap was not abundant and that this time around it will play an important role.

Currently, copper scrap represents about a third of global demand.

Actual copper prices and trends

LME copper prices increased marginally by 1.0% over the previous month to $7,757/mt.

Japan’s primary cash price increased 2.6% month over month to $8,098/mt.

U.S. producer copper grades 110 and 112 increased by 5.6%, resulting in a $0.23/lb increase to $4.36/lb. Meanwhile, copper grade 102 increased by 5.3%, resulting in a $0.23/lb increase to $4.58/lb.

Indian copper cash prices increased by 5.9% to $8.32 per kilogram.

Korean copper strip rose by 4.3% to $9.65 per kilogram.

China’s copper prices increased by 3.0% to $8,995/mt.

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cobalt

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The Renewables Monthly Metals Index (MMI) rose 2.7% this month, as Toronto-based First Cobalt signed multiple refinery feedstock agreements. (Editor’s note: This report also includes coverage of grain-oriented electrical steel, or GOES.)

January 2021 Renewables MMI chart

First Cobalt signs refinery feedstock agreements

Toronto-based First Cobalt announced Tuesday it has achieved a “key milestone” with new refinery feedstock agreements reached with Glencore AG and IXM SA.

The cobalt hydroxide deals will see First Cobalt receive a total of 4,500 tonnes per year beginning in 2022. The feedstock will come from Glencore’s KCC mine and China Molybdenum Co.’s — parent company of IXM SA — Tenke Fungurume mine.

The agreements represent 90% of projected capacity for the Canadian refinery. Furthermore, the deals will yield “22,250 tonnes per year of battery grade cobalt sulfate,” per the company’s announcement.

“This is a pivotal moment for our North American cobalt refining strategy,” First Cobalt President and CEO Trent Mell said. “Our globally competitive cost structure and industry-leading ESG credentials put us in a strong position for a rapidly growing EV market. With feedstock arrangements in place, we can continue to advance our vision to create a new cobalt supply chain in North America.

“Electric vehicle sales in Europe were up more than 100% in 2020 and the U.S. will be the next large market to take off.”

In other company news, First Cobalt signed a letter of intent with Kuya Silver Corporation to sell “a portion of its silver and cobalt mineral exploration assets in the Canadian Cobalt Camp and form a joint venture to advance the remaining mineral assets.”

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