Market Analysis

Oil prices have rallied this quarter, with Brent crude hitting a peak of U.S. $67.50/barrel, according to oil-price.com.

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Goldman Sachs is quoted in a note to investors as saying the resilient demand growth and supply outages could push prices up to U.S. $70/barrel in the near future.

Against a landscape of supply disruption, the surprise has been strong demand growth.

January saw demand increase by 1.55 million barrels per day year on year. Demand in China, in particular, is stronger than expected, the article noted. Despite subdued global GDP growth, consumers still see the outlook as positive — so, combined with comparatively low gasoline prices, consumption has remained robust.

On the supply side, OPEC and its non-member partners have done a remarkably good job of constraining excess supply. Following an agreement in October to trim production levels by 800,000 barrels a day through June 2019 — supported by Russia and other non-OPEC members matching a further 400,000 barrels a day — producers have managed to achieve most of the 1.2 million barrels of intended cuts.

Compliance has been high, too. MarketWatch reported the 11 OPEC members achieved 79% of their committed cuts in February, according to data from S&P Global Platts — an improvement from 76% a month earlier.

The Joint Ministerial Monitoring Committee, a production policy monitoring group, quoted even higher overall conformity with the production cut agreement last week, saying OPEC in February achieved almost 90% of its 1.2 million barrel daily reduction target. Sanctions against Iran and Venezuela have also made a significant dent to supplies, further squeezing the market.

The 800-pound gorilla is U.S. shale.

According to the Energy Information Administration (EIA), shale is expected to rise further in April, with the seven largest U.S. shale producers pumping 8.592 million barrels a day.

It is the potential for U.S. shale to more than make up for supply-side tightness elsewhere that is probably capping Goldman Sachs’ predictions of price rises beyond $70 a barrel.

MarketWatch quoted Baker Hughes, which reported active rig counts fell for a fourth straight week, suggesting output growth may be stalling — at least for the time being.

Crude price rises may stimulate more drilling if the price remains elevated; too much of a surge, however, will be self-defeating if inventories rise and the price subsequently falls.

The market, therefore, is in a delicate balance.

There is little OPEC and its partners can do to squeeze the market further. Deeper cuts are unlikely to garner support, but there is the option to extend the current cuts beyond the June deadline.

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All eyes will, therefore, be on U.S. tight oil production numbers in the months ahead. The medium-term oil price is largely down to shale oil producers’ enthusiasm to increase production at current prices.

[Editor’s Note: This is the second of a two-part series on steel supply and prices. Revisit Part 1 here.]

Actual Chinese Steel Prices

Looking at longer-term trends in Chinese steel prices, we can see after hitting a low during mid-to-late 2015, prices trended upward overall (with some ups and downs along the way). For example, prices dipped in summer 2016, in spring 2017 and somewhat less so in spring 2018.

More recently, prices dropped off last fall:

Includes partial March price data through the 12th. Source: MetalMiner data from MetalMiner IndX(™)

HRC and CRC prices trended very similarly, with the price gap narrowing over time. In fact, Chinese CRC prices stood higher in August 2014 than today’s prices. However, prices for CRC have remained above 4,000 RMB since August 2017.

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HRC prices increased slightly, while plate prices started out lower but trended higher than CRC. Over time, the price differential for HDG increased; however, the price trends reliably with HRC and CRC, especially since August 2017.

U.S. HRC Versus Chinese HRC Prices

Chinese HRC prices turned around in February and have gained momentum in March.

Includes partial March price data through the 12th. Source: MetalMiner data from MetalMiner IndX(™)

Prices moved similarly for both U.S. and Chinese HRC late in February and into March.

Meanwhile, the price gap between Chinese and U.S. prices narrowed into the early months of 2019:

Source: Analysis of MetalMiner data from MetalMiner IndX(™), including price data through March 12

U.S. CRC Prices Versus Chinese CRC Prices

China CRC prices have also increased in the early months of 2019.

Includes partial March price data through the 12th. Source: MetalMiner data from MetalMiner IndX(™)

The price gap between Chinese and U.S. prices narrowed, but still remains wider than prior to imposition of the U.S.’s Section 232 tariffs of March 2018.

However, with the shrinking price gap, U.S. purchases of U.S. domestic CRC, like U.S. domestic HRC, became relatively more attractive again:

Includes partial March price data through the 12th. Source: MetalMiner data from MetalMiner IndX(™)

Implications for Buying Organizations

What can we expect from the Chinese government in terms of production reductions?

Why do high-level goals, such as reduced production, fail?

“The profit gained from selling one ton of steel is less than the profit from selling one dish of fried pork,” Shen Wenrong, chairman of the largest private steel company in China, was quoted as saying in a 2015 Bloomberg article. This points to a lack of actual willingness of Chinese domestic producers to throttle production.

China’s stated policy of production reduction has not happened on a net basis, even after environmental protocols paused production at times. At any rate, production and export figures continue to rise out of China, even as the domestic economy apparently weakens.

Given that global production capacity for steels continues to increase, we can expect this to have a depressing effect on steel prices overall.

On the other hand, if Chinese production moves upstream, it is realistic to expect price increases that stick as production becomes more advanced.

Even with China’s continued increase in production, U.S. imports of steel from all global markets decreased by 11.5% in 2018 over the year prior, according to the American Iron and Steel Institute. Revenue also improved overall for U.S. steelmakers, according to government data.

However, what happens in China price-wise, will not stay in China.

Pricing impacts in China continue to affect global prices given the country’s consistent global share of production numbers at around the 50% over the past few years.

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As the Chinese government pushes the steel industry toward more advanced production, we can expect no less from domestic industry players in the U.S. As newer production facilities come online, we can expect to see closures of older production facilities. On a net basis, that is a good thing. If the U.S. industry continues to revitalize itself toward building long-term sustainable competitive advantages, it could avoid the so-called “Steelmageddon.”

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U.S. steel mills produced 1.93 million net tons of raw steel during the week ending March 16, according to the American Iron and Steel Institute (AISI).

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Production for the week — which came at a capacity utilization rate of 82.9% — was up 5.7% compared with the same week the previous year but down 0.6% from the previous week.

Adjusted year-to-date production through March 16 reached 20.3 million net tons — up 6.7% compared with the same period in 2018 — at a capacity rate of 81.4%. For the same period in 2018, mills produced 19.0 million tons at a capacity utilization rate of 76.6%.

By region, the Great Lakes holds the top spot in terms of steel production for the year through March 16:

  • North East: 226,000 net tons
  • Great Lakes: 729,000 net tons
  • Midwest: 205,000 net tons
  • Southern: 711,000 net tons
  • Western: 59,000 net tons

The U.S. steel sector’s capacity rate continues to climb on the heels of the Trump administration’s Section 232 action last year. In general, a capacity rate of 80% is considered a mark of a healthy industry.

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U.S. steelmakers increased production in 2018, as they were able to compete against reduced import levels (steel imports into the U.S. were down 12% year over year in 2018).

According to the World Steel Association, the U.S. produced 86.7 million tons of crude steel in 2018, up from 81.6 million tons in 2017.

According to Bank of America Research Analyst Timna Tanners, Steelmageddon looms on the horizon due to massive planned capacity increases in the U.S. steel industry.

Her analysis indicates the equivalent of around a 20% capacity increase when aggregating investments across companies and production methodologies over the next few years. Due to the massive ramp-up, the Steelmageddon theory predicts 2022 or so as the time when we may see greatly suppressed prices, and therefore rampant mill closures, due to a steel supply glut in the U.S.

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Meanwhile, in recent years, the Chinese government policy for the steel industry focused on capacity reduction and shutting down outdated plants. These closures resulted in an estimated reduction of 300 million metric tons of China’s steelmaking capacity.

In addition to these outdated blast furnace steelmaking facilities closing during the past few years, others still in operation face ongoing production restrictions during pollution alert periods. While some outdated capacity closed, other facilities with the latest technology brought new capacity onstream.

This “upgrade strategy,” if we could call it that, could have profound ramifications.

Read more

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Stock and currency markets have been a little perkier the last week or so as expectations rise of some form of Chinese stimulus to boost demand — and, hence, global growth.

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That optimism, though, may be somewhat misplaced.

China has limited scope of debt-fueled stimulus of the type employed in the past, so a pick-up in demand resulting from fiscal measures may be more muted than some optimists hope.

Still, hopes were raised when Premier Li Keqiang closed a briefing to the National People’s Congress with a number of announcements. Beijing intends to use tools such as lowering bank reserve requirements, according to Bloomberg.

However, a promise to reduce VAT on manufactured goods from the current 16% to 13% from April 1 gave a definite fillip to traders and cast depression among hard-pressed aluminum semis manufacturers in the region. More competitively priced Chinese aluminum semi-finished product is the last thing regional aluminum producers want on their doorstep.

The measure is expected to further boost exports, which have already been running at near-record levels in 2018-19. According to Aluminium Insider, exports have risen from 517,000 tons per month last August to 552,000 tons in January to set a new record. Primary producers, who had been meeting to negotiate capacity closures in the face of slowing demand, are reportedly now likely to reverse that decision in the hope demand will pick up.

According to Aluminium Insider, the move is expected to pump in the region of CNY 600 billion (U.S. $90 billion) into the manufacturing sector, boosting the country’s gross domestic product by 0.6%. The move comes as the latest in a series of changes to the country’s tax regime conducted by Beijing, carried out to bolster the economy after manipulations of monetary policy and further debt-based spending have become increasingly difficult avenues for effecting change.

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Optimism is supported by the widespread belief that an agreement on China’s trade war with the U.S. is just a matter of weeks away — but the much-touted trade summit between President Donald Trump and Premier Li Keqiang has been postponed yet again, and may now not take place until well into April or even May.

A successful trade deal is by no means a certainty, as much as the markets will look for any deal to be better than no deal.

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The March 2019 Monthly Metals Index (MMI) report is in the books.

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It was another month of upward movement for a majority of the MMI subindexes. After a sluggish close to 2018, six of 10 subindexes moved up for the March MMI, The Aluminum, Automotive, Copper, Global Precious, Raw Steels and Stainless MMIs all posted increases for the month, while the Renewables and GOES MMIs fell and the Construction and Rare Earths MMIs traded flat.

Meanwhile, in trade news, the U.S. continued trade talks with China, with some optimistic reports suggesting a deal could be imminent. However, previous deal attempts have failed in late stages, so it remains to be seen whether this time will prove any different. The negotiations come as the U.S. Census Bureau recently released data showing the U.S. posted a record trade deficit in 2018, including a deficit of $419.2 billion, up from $375.6 billion in 2017.

As for trade news in the U.S.’s neck of the woods, the United States-Mexico-Canada Agreement — which would supersede the North American Free Trade Agreement (NAFTA), approved in 1994 — remains in legislative limbo. The legislatures of the three countries must approve the deal before it can go into effect. The status of the extant Section 232 tariffs on steel and aluminum from Canada and Mexico remains a sticking point.

A few highlights from this month’s MMI series:

Read about all of the above and much more by downloading the March 2019 MMI Report below:

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The Renewables Monthly Metals Index (MMI) fell one point this month for an MMI reading of 103.

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The Hunt for Cobalt

As noted routinely in this installment of the MMI series, cobalt is a coveted material for its use in a wide variety of high-tech applications, from cellphones to laptops and much more.

A majority of the world’s cobalt is mined in the Democratic Republic of the Congo, where political instability and the government’s revision of its mining code (increasing royalty rates for cobalt and other materials) have posed business challenges to miners.

As such, it’s not surprising that some are looking for new sources of cobalt.

According to a Bloomberg report, a new startup powered by a coalition of billionaires, including Bill Gates, is seeking to do just that.

The startup, KoBold Metals, aims to create a “Google Maps for the Earth’s crust,” according to the report, in an effort to locate new sources of cobalt.

“KoBold Metals applies statistical modeling, big data aggregation, and basic science to materially improve the pace and efficacy of natural resources exploration,” KoBold’s website states. “We are applying our proprietary platform, Machine Prospector, to explore for new sources of ethical cobalt from reliable jurisdictions.”

The approach would also offer more specific focus to cobalt, as opposed to mining of the material as a byproduct of copper or nickel, as is typically the case.

“People just haven’t looked for the stuff,” KoBold CEO Kurt House told Bloomberg. “There’s very limited history of exploration at all outside of piggybacking on nickel and copper deposits.”

Cobalt Price Slides

Sticking with the cobalt theme, the price of the coveted material plunged throughout the second half of 2018 — and a recovery is not expected in the near term.

According to Reuters, the cobalt price fell to a two-year low of $32,000 per ton, down from $100,000 per ton in the first half of 2018.

What contributed to the plunge? According to the report, high prices led to an uptick in supply. However, cobalt demand is expected to exceed supply in the long term, according to the report.

GOES Prices Fall

The price of grain-oriented electrical steel (GOES) fell 4.1% month over month to $2,360/mt as of March 1.

The GOES MMI fell 8.2% for a March value of 168.

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Actual Metal Prices and Trends

Japanese steel plate fell 2.3% month over month to $772.30/mt as of March 1. Korean steel plate rose 1.9% to $586.67/mt. Chinese steel plate increased 3.8% to $642.72/mt.

U.S. steel plate fell 1.8% to $997/st.

The Chinese neodymium price fell 1.8% to $58,29.10/mt. Chinese silicon rose 0.2% to $1,539.54/mt, while Chinese cobalt cathodes jumped 0.2% to $99,397.20/mt.

Well, some folks have been talking about it for a while, but figures this week suggest the long-anticipated slowdown has arrived.

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Negative numbers out of China have been reported for some months now, particularly falling PMI figures suggesting a steadily deteriorating outlook. Beijing has set a target of GDP growth range of 6.0-6.5% this year, according to The Telegraph, down from a hard target of 6.5% over the last two years, and blamed the trade war.

It’s debatable whether China will even manage 6% this year. While the trade war with the U.S. has exacerbated problems, the slowdown started before President Donald Trump’s Section 232 and Section 301 actions.

Nevertheless, the trade war is certainly making matters worse.

Another article in The Telegraph reports a sharp fall in Chinese shipments. Imports and exports are both falling, while Premier Li Keqiang is quoted as saying this week that “Instability and uncertainty are visibly increasing and externally generated risks are on the rise, downward pressure on the Chinese economy continues to increase, growth in consumption is slowing, and growth in effective investment lacks momentum.”

Until now, a sluggish Europe and a slowing China were being counterbalanced by a robust U.S. economy and decent growth in other emerging markets.

But last week, shock jobs data suggests U.S. growth is not a given.

The 20.7% slump in February was four times greater than predictions of a 5% decline, with just 20,000 workers added to payrolls — some 160,000 fewer than expected.

Some are attributing the sharp slowdown to the impact of tariffs and negative investment sentiment, mounting pressure on the president to reach a deal with the China this month. The tariffs were promoted as a solution to the growing trade deficit, but so far at least the opposite has prevailed.

The U.S. Department of Commerce is quoted as saying last week that a 12.4% jump in December contributed to the record $891.3 billion goods trade shortfall last year. The overall trade deficit surged 12.5% to $621.0 billion, the largest since 2008, effectively junking suggestions that the U.S. could tariff its way out of the deficit.

The situation may not have been helped by the president’s tax giveaway that has in part been spent on the import of luxury goods, such as autos. The impact of higher domestic prices, though, seems as much psychological as actual, with consumers postponing purchases in the face of rising prices.

Salaries are rising, unemployment is low, consumers are not fearful of their future in the way they are in a recession, but they may be deferring buying in the hope of a trade deal and a reduction in costs later in the year or next.

The danger is by then we really may be in a recession if the economy, both in the U.S. and globally, does not get back on track this year.

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Negative sentiment has a tendency to be self-fulfilling.

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This morning in metals news, the Canadian government announced it is rolling out $100 million in funding for its domestic steel and aluminum industries, copper moves toward a seven-month high, and Vietnam’s steel exports to the U.S. increased in 2018.

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Canadian Steel, Aluminum Get a Boost

The Canadian government has announced it will offer $100 million in funding to small- and medium-sized aluminum and steel firms in the country, the CBC reported.

The U.S.’s Section 232 tariffs on steel and aluminum remain in place for NAFTA partners Canada and Mexico. Those tariffs are the primary point of contention as the successor to NAFTA — the United States-Mexico-Canada Agreement (USMCA) — still needs to be ratified by the three countries’ legislatures.

Copper Continues Hot Streak

The copper price moved toward a seven-month high on Tuesday, Reuters reported.

LME copper jumped 1% to $6,472.50 per ton, according to the report.

Vietnam Steel Sector Grows

Despite the U.S.’s aforementioned Section 232 tariffs, one southeast Asian country saw its steel exports to the U.S. rise last year.

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According to an S&P Global Platts report, Vietnam’s finished steel exports to the U.S. surged 48% in 2018 compared to 2017.

The Copper Monthly Metals Index (MMI) increased by 3.9% this month, reaching an MMI value of 79.

With a seven-week sustained increase in prices, the rally may be over for the metal.

Trading volume dropped off in late February and the price moved sideways once again in early March.

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With week-on-week price gains for seven straight weeks, LME copper prices reached a high of around $6,500/mt before retreating back to $6,477/mt in early March trading, finally exceeding the $6,380/mt price point around which it oscillated since July.

While higher prices indicate bullishness, falling trade volumes appear as bearish; therefore, with mixed signals, the price has begun to move sideways overall.

LME copper prices. Source: MetalMiner analysis of Fastmarkets

From a longer-term perspective, LME copper prices remain within their historical trading range.

In 2011, copper reached $10,000/mt and higher prior to a long-term downtrend. The market bottomed out in 2016 around $4,600/mt before retracing and oscillating at around $6,000/mt during the first half of 2017.

LME weekly copper prices and volume. Source: MetalMiner analysis of FastMarkets

We can see that a previous eight-week rally preceded a longer-term sustained price uptrend during 2017. On this basis, perhaps we could see more pricing upside, but the rally appears to have softened as of press time, turning around at $6,500/mt. The price has no soared quite as high as it did previously.

Here is a one-year analysis of LME copper trading volume and open interest:

Source: MetalMiner analysis of FastMarkets

Based on current mixed signals, as monthly open interest dropped in February and monthly volume only edged up very slightly, there may not be as much upward momentum as might otherwise be expected for copper prices.

Chinese Copper Scrap vs. LME Copper

Source: MetalMiner data from MetalMiner IndX(™)

While LME copper and Chinese copper scrap prices both increased in February, the latter increased only slightly. The price differential increased as LME price increases outpaced copper scrap price increases.

LME warehouse stocks trended downward throughout the year, supportive of higher copper prices. According to Reuters, LME-registered warehouse stocks fell to 21,600 tons and remain at their lowest point since 2005. However, some of this decline may be attributable to new LME warehouse rules that make it more difficult to generate a return; therefore, excess available stocks might not get deposited into LME warehouses.

Additionally, stocks of the metal in SHFE warehouses hit 227,049 tons in late February, following cyclical restocking at the start of the year, which more than doubled the volume available following a recent low of around 100,000 tons in late 2018.

According to the International Copper Study Group (ICSG), refined copper production has fallen short of demand for multiple years now. Supply shortages are bullish for prices, which may have also pushed LME copper prices higher in early 2019.

What This Means for Industrial Buyers

Following the recent seven-week price rally, copper prices finally breached the $6,380/mt level, signaling that copper could be heading back into higher pricing territory.

On the other hand, lower trading volumes signal bearishness. It’s possible that significant LME shadow stocks, buoyant Chinese supplies of the metal and weak domestic demand in that country may act as price moderators, keeping prices in check.

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Actual Copper Prices and Trends

In February, like January, the Copper MMI basket increased, with the sole exception of Korean copper strip, which fell by 3%.

India’s copper cash price saw the biggest gain at 6.5%, closely followed by Japan’s primary cash price, which increased 6%. Most of the remaining metals in the basket increased in the 4-5% range, with the exception of China’s copper #2 scrap price, which was up 0.47%.