Market Analysis

The ongoing turmoil over Donald Trump has increased investors’ worries over political stability in the U.S. In addition, investors worry that under these political turbulences, the Trump administration will struggle to implement pro-growth initiatives.

The dollar is one asset that was affected by the news, falling to a 6-month low. Investors have been selling dollars and buying euros as political risks rise in the U.S. and, following the French elections, fall in Europe.

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Usually, a falling dollar would give a boost to industrial metal prices, but that wasn’t the case here. Precious metals like gold did benefit from a falling dollar, but it didn’t prevent base metals from declining. This is because investors are now focused on what looks like a slow down in China.

Investors were disappointed when China’s Caixin Manufacturing PMI came at 50.3 in April, the lowest reading since September 2016. In addition, as Beijing talks about curbing credit, investors have come to realize that lower funding for the construction of infrastructure projects will hurt demand for industrial metals.

Just about two weeks ago we noticed that commodity markets were getting in trouble. As time goes on, that weakness is spreading out into industrial metals. Some specific metals are holding their value better than others due to their specific supply narrative, but overall we would expect them to move in tandem, as they always do. Here are some charts suggesting that the bull cycle in industrial metals could be ending:

Nickel falls to a 10-month low. Source: MetalMiner analysis of fastmarkets.com data

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Copper prices took a hit in May because of a surge in LME inventories. Or… was it because of that?

I’ve pointed out this before, but people continue to talk about copper stocks to explain price movements. LME inventories rose in May by 64,000 tons, or 25%, at the same time that prices fell. But that’s simply a coincidence.

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Most of the time, inventory inflows and outflows can simply happen because traders move metal from one destination to another to profit from price arbitrages. Indeed, in November copper prices climbed 20% while LME stocks rose by more than 90,000 tons. I would argue that inventory levels have no predictability on price trends. But then what drove copper prices down?

China to Halt Credit Growth

China is putting efforts on halting risky lending and rising borrowing costs in order to limit credit growth. Interest rates in China have risen to the highest level in two years while the country’s tough talks on curbing credit are expected to put the brakes on credit growth.

As I wrote last week, “the noticeable tightening in Chinese monetary policy is bad news for property markets in China. The country has also pledged to halt risky local funding on the construction of infrastructure projects. Investors know that this will hurt demand for commodities and industrial metals.” Read more

Set of copper pipes of different diameter lying in one heap

Copper on the Shanghai market traded lower this week with investors choosing equities and oil, an area where a domestic rally was overflowing into Asian markets.

According to a report from Reuters, three-month copper on the London Metal Exchange did find some support, trading 1.1% higher, which offset losses from the previous session.

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However, the Reuters report also stated that LME copper stayed close to the four-month lows reached earlier this week as the market suffered from weak demand stemming from China and falling imports.

The most popular copper contract on the Shanghai Futures Exchange slipped to $6,558 a ton, Reuters reported, a decline of 0.71%.

Copper Bears Take Over

Just this week our own Raul de Frutos wrote of the commodity outlook shifting for copper buyers, as well as buyers of aluminum, steel and tin, and that the bears are taking over:

de Frutos wrote: “About a month ago I noted that while industrial metals were on the rise, commodities were range-bound, a sign of sluggish global demand. As I had written, ‘a healthy bull market in base metals should be accompanied by a bull market in other commodity markets.’ Commodities not only have struggled to make new headway but in the past few days they weakened significantly. Recent moves in China have caused a significant shift of sentiment in financial markets.”

de Frutos cited several issues, including oil prices taking a dip and China curbing its credit, to signal that the bull market for commodities might be coming to an end.

How will copper and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Last month we reported that in March, U.S. domestic steel prices generally rose while the GOES M3 price fell. This month, we can safely report the exact opposite price change. U.S. domestic steel prices fell while GOES prices rose in April.

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In our April update, MetalMiner indicated that GOES prices might find a price floor on the back of a large 20,000/mt tender from Bharat Heavy Electricals. That indeed appears to have happened. Moreover, according to a recent TEX Report, GOES prices have continued to climb in China as Baoshan Iron & Steel needs to service the domestic market due to anti-dumping cases preventing Japanese and Korean imports to that market.

The TEX Report also suggests that global inventories remain low and that many countries have come into the market all at the same time, requiring material. This could lead to higher prices, particularly from the Japanese mills for contracts awarded during the second half of the year.

The Gorilla in the Room

The real challenge for domestic GOES prices, however, rests on the results of the Section 232 steel product investigation launched by the Trump administration in late April. The results will likely not come much before January 22, 2018, assuming the Secretary of Commerce takes the allowable 270 days to present findings to the President. At its core, the investigation seeks to address the issue of

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Our Stainless MMI took another dip in April, amid a broad sell-off in industrial metals. In addition, at the beginning of May, the Philippine parliament rejected Regina Lopez’s bid to be appointedas environmental minister. In a matter of weeks, nickel’s story has shifted from a clear supply shortfall to a rather complex narrative, ruining nickel bulls’ party.

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Nickel prices on the LME fell by 5% in the next two days after the news.

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Industrial metals for the most part fell in April, but that wasn’t the case for aluminum. The lightweight metal outperformed its peers as aluminum is expected to be the next target of supply-side reform in China, according to Goldman Sachs.

The New Steel?

While China tries to transition from a manufacturing economy to a service-driven one, it is aiming to cut industrial overcapacity due to environmental problems. China previously indicated its strong intentions to implement supply-side reforms in the steel industry. As a result, steel prices in China rose by 70% in less than a year.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

China’s energy intensive aluminum smelters receive nearly 90% of their energy needs from coal. In addition, China has received a lot of international pressure to reduce its aluminum capacity. For these reasons, aluminum could be the new steel this year.

To start, China announced in late February that it would cut as much as 30% of its aluminum production over the winter months. As my colleague Stuart Burns put it, “Beijing has shown solid intent in this direction, already denying planning approval to 2 million tons of new capacity in China’s northwest province of Xinjiang and clamping down hard on plants elsewhere that it deems to be failing environmental standards.” In addition, industry watchers believe that this might just be the beginning as more closures are expected to come in heavily industrialized provinces.

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Our Global Precious Metals MMI inched up a point in April. However, this year the index seems to be struggling near 84 points. Let’s take a look at gold and palladium, two of the precious metals integrated in this index, to better understand the ongoing trend in precious metals.

Two-Month Trial: Metal Buying Outlook

Gold

Some analysts are saying that gold is up this year on its safe haven appeal due to rising geopolitical instability. But that’s simply not true. Otherwise, we would see it reflected in stock market indexes, which are trading at record highs. Not only the U.S. but also Europe, China and other emerging markets are seeing their stock markets hit multi-year highs. Investors are confident about the prospects for the global economy, and until something proves them wrong, gold is lacking any appeal as a safe haven.

Gold CME contract. Source: MetalMiner analysis of stockcharts.com

If you held gold this year, don’t thank rising political tensions; simply thank a weaker dollar and some dip buying. This year’s rally in gold follows a 18% price slump in Q4 of last year. But prices are back to their average and just 8% below $1,380/oz, a level that has been a ceiling to gold prices for four consecutive years. This means that investors will have to find good reasons to chase prices higher. Given the ongoing strength across global stock markets and the rather neutral picture of the dollar, we wouldn’t expect gold investors to get a good return on their money for the balance of the year.

Palladium

As I’ve written earlier on MetalMiner, “palladium prices rose to a two-year high in April, making it the biggest gainer among precious metals. Last month we outlined some of the factors contributing to the palladium price rise: a growing auto sector; a strong South African currency; a falling dollar; and bullish sentiment across industrial metals. However, as prices continue to climb, it’s time to question how high prices can go. Despite a still solid outlook, there are some reasons to believe palladium prices could be nearing their peak.”

One of them is a potential slowdown in demand for cars. U.S. car sales declined in April, following a disappointing month of March. Markets suspect that the car industry boom that has run since 2010 has now come to an end.

Meanwhile in China, car sales are still going strong, but the pace is not the same as last year. As I wrote before, “weaker sales tax incentives have put pressure on demand this year and are expected to slow down demand even more next year. Buyers of cars with engines up to 1.6 liters paid a 5% purchase tax last year, but they are now paying a 7.5% rate. Buyers are still finding incentives to rush on buying cars this year since the rate will increase to 10% in 2018.”

Palladium nears long-term resistance levels. Source: MetalMiner analysis of stockcharts.com data

Finally, as with the case of gold, palladium might need the stronger fundamentals to lure investors to chase prices higher. Historically, palladium has peaked in the range of $850-$900. Prices closed in April at $827.

FREE REPORT: How Circumvention Impacts Both Downstream, Value-Added Manufacturing

What This Means For Metal Buyers

Precious metals gained this year, but gains won’t come easily from now onwards. The opportunity to buy or invest in precious metals might have passed by.

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Our Copper MMI fell by two points in April, dragged down by a sell-off in industrial metals. In addition, supply concerns have eased as strikes at some mines ended.

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The strike at Escondida in Chile, the world’s largest copper mine, ended in late March. Soon after, a 18-day strike at the Cerro Verde mine in Peru also came to an end. A new strike at the mining company Southern Copper Corp. in Peru took place in April, but it lasted only two weeks, leaving no significant effect on production.

Meanwhile, Freeport McMoRan finally obtained a permit to export material from its Grasberg mine, the second largest copper mine in the world. The new permit will allow the company to export 1.1 million tons of copper concentrate through February of next year.

However, Freeport now has a new problem on its hands. Workers have threatened a one-month strike starting in May. The company had laid off about 10% of its workers, saying that there may be more layoffs in the future to stem losses. Moreover, the company is still confronting Indonesia over rights to the mine. With this problematic combination of protests from workers and tensions with the Indonesian government, it’s no wonder that investors are concerned about further supply disruptions this year.

What This Means For Metal Buyers

Although supply disruptions eased in March and April, there is overall plenty of potential for further disruptions this year. Prices took a dip in April, but that seems to be a normal price action given that most industrial metals fell in the same month.

Free Sample Report: Our Annual Metal Buying Outlook

After a spectacular rally in Q4 of last year, prices are now consolidating in the price range of $5,500-$6,100/mt. Bulls seems still in control but they probably need another bullish development to chase prices above this price range. That development could come in the for of additional supply disruptions this year. We will be watching closely the developments at the Grasberg mine in the coming week in addition to the several mines that have contract negotiations due to this year.

Actual Copper Prices and Trends

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Here’s What Happened

  • The Automotive MMI, our sub-index of industrial metals and materials used by the automotive sector, dropped by one point for a May reading of 8, a 1.1% drop.
  • This is the third straight month of declines for this index. Back in February 2017, the Automotive MMI hit 92 — its highest level since November 2014. But now, flagging HDG steel, copper and shredded scrap prices are dragging on the rest of the index.

What’s Going On in the Background?

  • The U.S. auto market is officially slowing. Car sales dropped 4.7% to 1.43 million units, according to Autodata Corp. That is a bigger drop than forecasted by both Edmunds and Kelly Blue Book, according to several news outlets.
  • Meanwhile in China, the first quarter of 2017 saw a 7% overall increase in car sales. As we reported in our Monthly Metal Buying Outlook (free trial here), that was the strongest showing since 2014. The Chinese government has extended tax cuts for small vehicles, which should keep citizens buying cars through the year.

What Metal Buyers Should Look Out For

  • Many factors coming down the line — including increased construction projects in China — portend longer-term support for key automotive constituent metals such as HDG steel.
  • Even though HDG has slipped a bit this month, prices for that metal form in China could see room for improvement.

Key Price Movers and Shakers

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Our Raw Steels MMI fell seven points* due to the slump in China’s steel prices in April.

Raw Steels MMI

(*Note: We changed one of the data elements of our index to map the underlying market more effectively. That change contributed to a lower number this month.)

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Since their peak in February, China’s steel prices have fallen by more than 20%, while U.S. prices have continued to climb. But guess what, things changed towards the end of April. Prices in China started to recover (see how we predicted that) while U.S. prices fell (yes, we predicted that too). In this post, I’ll analyze what this price divergence means and how you — assuming you buy or invest in steel — can take advantage of it.

China HRC price. Source:MetalMiner IndX

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