Market Analysis

The price of several metals has traditionally been looked at paired with that of another metal. For example, gold and silver prices are looked at in isolation and relative to each other, in part because both metals make up a major part of the jewelry trade.

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So, too, are zinc and lead prices, where the correlation is not from market applications but from the fact lead and zinc are often co-mined from the same resource.

Like precious metals gold and silver, less prominent platinum and palladium can be both mined and used in very similar applications. The Platinum Group Metals, or PGMs, are often magmatic in origin and rare in economic concentrations. The majority of the world’s platinum and palladium comes from South Africa, Zimbabwe and Russia, where early low-cost surface mines have long since given way to deep, expensive and complex operations.

As the name suggests, platinum as long been the investor’s favorite PGM and enjoys the widest number of applications.

Recently, however, its quiet PGM peer palladium has caught investors’ interest.

Palladium has traded at a discount to platinum because of platinum’s greater cost of extraction and its wider scope of applications. But one application in which palladium does excel is catalytic converters for petrol engines. The diesel engine’s relative loss of favor over the last 12 to 18 months to the petrol engine has boosted demand for palladium, driving up the price to the point that it exceeded that of platinum this month for the first time in 16 years.

On Monday, palladium exceeded $1,000 per ounce on the London market compared to its platinum’s $950 per ounce.

The reasons are not hard to find.

The platinum market is in surplus, but that of palladium is estimated by Joni Teves, an analyst at UBS quoted in The Telegraph, as experiencing a shortfall in production, which could push the market into a deficit of 830,000 ounces this year, as miners have cut back production.

In fact, John Meyer, analyst at SP Angel, is quoted as saying, “Marginal mine shafts have been closing at a rate of knots. We could see production in both palladium and platinum continue to fall as a result of ongoing rising costs. I don’t think the current rally (in prices) is enough to reverse that.”

Meanwhile, market demand is shifting.

Platinum that is used more in diesel engines has seen falling demand. With car sales growth featuring more in petrol-engine-dominated American and Chinese markets, and less in diesel markets like Europe, the demand bias has been for palladium, rather than platinum.

But even within Europe there is gradual shift from diesel to petrol.

Sales of diesel cars in western Europe fell from 45.1% of the market to 42.7% this year, according to industry research group LMC, with a forecast it will continue to decline to 39% by 2022 as petrol gains favor and hybrid or electric vehicle sales grow.

Some, though, are voicing caution.

Much of the enthusiasm for palladium has been investor-led — it is a small and relatively illiquid market, meaning not a large volume of positon taking is required to dramatically boost prices. Given time — and it would take time — catalysts could be altered to accommodate more platinum to the detriment of palladium demand, if the palladium price stayed at a premium to platinum over time.

In the longer term, electric vehicles are expected to sound the death knell for both metals (at least, with respect to automotive demand). Counter to this is the upcoming move by predominantly petrol engine China to increase its emission standards to the much tighter China 6a standards by 2020. Johnson Matthey says many manufacturers could leapfrog even this standard and aim to future-proof themselves to the yet more stringent China 6b standard expected in the middle of the next decade.

The enhanced PGM loadings such a move would require will maintain palladium demand — certainly well into the next decade — and could be the basis of investors’ longer-term enthusiasm for the metal.

Free Download: The October 2017 MMI Report

Either way, for the time being palladium has come out of the shadows and is having its day in the spotlight. For how long, we will have to see.

Precious metals dynamics have looked similar to base metals during these last couple of months.

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The four precious metals (gold, silver, palladium and platinum) rallied since July, and peaked in September. In September, precious metals saw a price pullback, as did the base metals.

Gold spot prices (see graph below) reflect this movement perfectly.

After the price retracement in September, gold spot prices increased again. The gold rally that started at the beginning of 2017 appears set to continue. More movements to the upside could occur for the rest of the year.

Source: MetalMiner analysis of FastMarkets

Silver prices, however, have traded sideways, showing less of a bullish sentiment than gold. However, silver has shown the same price movements (in different price ranges) from July to October (see chart below).

Does this set the foundation for a new long-term uptrend?

Source: MetalMiner analysis of FastMarkets

As Fouad Egbaria noted: “As of Oct. 1, palladium closed higher than platinum. The last time that happened? Sixteen years ago.” Palladium prices rallied, as did gold prices, while platinum prices traded sideways, similar to silver.

Palladium prices. Source: MetalMiner analysis of FastMarkets

Platinum prices. Source: MetalMiner analysis of FastMarkets

However, both palladium and platinum showed the same price pattern since July. Those price movements may point toward an ongoing bullish market.

As reported by Reuters, the commodities outlook for Q4 looks bullish. MetalMiner also remains bullish on both commodities and base metals, and expects more movements to the upside while the U.S. dollar remains weak.

Free Download: The October 2017 MMI Report

A complete analysis of commodities and base metals for 2018 is published in our free Annual Outlook report. 

Life is full of ups and downs.

So, too, is the world of metals.

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Last month, all 10 of our MMIs saw upward movement. This month? Not so much.

Eight of 10 MMIs tracked back this month, albeit several of them fell by small amounts. The GOES MMI, meanwhile, picked up a point, while the Aluminum MMI posted no movement.

If you’ll remember, copper and aluminum had big months in August, as we detailed in last month’s MMI report. After a cooling period last month, though, so far in October copper has tracked back upward — so maybe it was just a September slump for the good Dr. Copper.

“However, market watchers can see a new rally taking place within the base metals industry,” wrote our Irene Martinez Canorea in her Copper MMI report. “Copper prices — along with lead and tin — increased sharply on heavy trading volumes. Buying organizations can expect upward movements within the bullish market.”

Meanwhile, as for aluminum, the flat month is actually an encouraging sign for the metal’s strength.

“Aluminum traded sideways in September,” Martinez Canorea wrote. “This trading pattern suggests resilience, as aluminum prices digest price gains and become strong again to continue the uptrend. Trading volumes continue to support the current rally, driving aluminum prices to a five-year-high in September.”

The aforementioned represents a small snippet of the analysis available in this month’s report.

You can read about all of the aforementioned — and much more — by downloading the October MMI report below.

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Here’s What Happened

  • MetalMiner’s Global Precious MMI, tracking a basket of precious metals from across the globe, cooled off considerably after a sharp rise last month. For October, the sub-index dropped 3.4% to hit 86. That’s nearly back to the August 2017 level.
  • Palladium held steady for a month, but still continues a measurable march upwards. The platinum group metal held above the $900 per ounce level for the second straight month.
  • Platinum did lose a bit of its luster, however, falling back toward the $900 per ounce level and receding from its most recent high of March 2017 (when it landed above $1,000 per ounce). What does that mean? Something quite historic (see the section below)
  • After breaking and holding above the $1,300 per ounce threshold at the beginning of September for the first time since October 2016, the U.S. gold price retraced its steps as well, diving back under that level for the beginning of October.

What’s Going On in the Background?

  • We have quite the record to report. ICYMI, my colleague Fouad Egbaria noted recently that the platinum-palladium relationship reached a milestone: “As of Oct. 1, palladium closed higher than platinum. The last time that happened? Sixteen years ago.”
  • According to a research note from commodities broker SP Angel quoted within a report by Kitco News, “Palladium is benefitting from its inclusion in catalytic converters in gasoline-powered vehicles, which is expecting robust growth from the shift from diesel engines following the 2015 Volkswagen emissions-rigging scandal, and hybrid electric vehicle demand.”

What Metal Buyers Should Look Out For

  • Other analysts have thoughts on platinum/palladium outlook as well. “In the short term, we think platinum is undervalued for a whole host of reasons. Therefore, we think there is scope for platinum to move back to a slight premium in the short to medium term,” Robin Bhar, metals analyst at Societe Generale, was quoted as saying in the Kitco News report. “We don’t see a sustainable premium of palladium over platinum…until about 2020 or 2021.”
  • Overall, however, investors have been seeing nice returns, according to International Banker. The article notes a Reuters poll “of 26 analysts and traders conducted in July, [in which] the average palladium price for 2017 [was] being predicted at $811 per ounce for this year, which is 5 percent above the previous poll conducted in April…[and] the highest annual average price on record, going back three decades.” Well, now we’ve broken $900 per ounce.
  • That makes Standard Chartered rosy as well. “We remain constructive on palladium’s outlook,” according to the bank’s analyst, Suki Cooper. “Not only is the market set to deliver a deficit this year, but it looks set to be undersupplied over the coming years.”

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Key Price Movers and Shakers

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The October GOES M3 moved up by one point to 194. Meanwhile, as MetalMiner reported last month, imports have increased throughout 2017, largely due to higher Japanese import levels.

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This trend continued in September with a noted overall import increase of nearly 11.5% from August import levels while Japanese import levels increased by nearly 18%, according to the latest International Trade Administration data.

Last month, this publication noted that Japanese imports accounted for 55% of total monthly GOES imports. However, this number jumped in September to nearly 70% of total imports. Japanese mills primarily produce the higher grades of grain oriented electrical steel, including H1-B, as well as laser quality materials.

According to a recent TEX Report, Japanese mills will likely begin negotiations within the next week or two for 1H 2018 volumes. Many producers of these H1-B and laser quality materials have obtained price increases but at the same time, the price spread between conventional grades and high-grades has increased.

Whenever the market creates a spread wider than the historical average, buying (and selling) organizations can take advantage of arbitrage opportunities. Though we tend to see these types of trends more typically in other steel markets, such as hot-rolled coil or cold-rolled coil, market anomalies for GOES create buying opportunities.

Therefore, we could expect the Japanese mills to pay very careful attention to price levels so as not to exacerbate the current price spread between the two types of materials and to prevent buying organizations from considering alternatives.

From a U.S. import perspective, we can see that average prices from Japan have increased to the U.S.

Source: International Trade Administration

When ATI left the GOES market here in the U.S., the industry needed to reconfigure its supply chains for standard or conventional materials. Power equipment manufacturers moved production elsewhere and/or secured new sources of supply offshore.

Clearly, the demand for high-grade materials continues to rise.

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Exact GOES Coil Price This Month

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The Stainless Steel MMI dropped four points this month for an October reading of 63. The drop was driven by decreasing LME nickel prices, together with Chinese and Indian stainless steel prices trending downward.

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However, stainless steel surcharges have increased this month. Buyers of stainless steel will see a new graphite surcharge starting in November. Outokumpu announced this new surcharge first and AK Steel shortly followed suit, explaining that production costs have risen. We expect to see other stainless mills announce similar surcharges.

This surcharge, a graphite electrode surcharge, came as a result of tighter global supply of graphite used in electrodes in the electric arc furnace (EAF) steelmaking process.

How is Graphite Used in the Steel Industry?

To better understand the impact this surcharge may have on stainless steel prices, let’s examine how graphite is used in the steelmaking process.

Graphite is a polymer of carbon that is used in the steel industry to produce steel (both stainless and carbon steel). Due to its heat and electric properties, graphite serves as the main component of the electrode, also known as a consumable. EAF production methods require the use of graphite electrodes, which require replacement every 8-10 hours.

Source: Industrial Efficiency Technology Database

Graphite prices, like other opaque markets, come as a result of direct negotiations between buyers and sellers.

Both the flake size and purity (large +80 mesh and XL flake +50 mesh) drive the negotiation process. Graphite prices have increased by 25-30% in the last couple of months on the back of improving steel demand. Prices are currently at $1,100/ton, still well below the 2012 peak of $2,800/ton.

Source: Northern Graphite pricing

Supply and Demand

China produces 70-80% of the world’s graphite supply; thus, the world depends, like it does for many metals, on China.

Back in the 1990s, China dumped graphite on the market to earn foreign exchange, which caused  graphite prices to decline.

Chinese mines remain small and seasonal, which means production appears lumpy and, in some cases, not guaranteed throughout the year.

However, recent environmental policies have impacted graphite mines.

This modernization and consolidation of the mining industry has translated to increased costs and lower production, caused by the closure of illegal miners and the elimination of marginal producers.

Moreover, China has imposed a 20% export duty on graphite and a 17% VAT to help protect its own industry. This has created supply concerns all over the world.

Both the European Union and the United States have declared graphite a strategic material. Furthermore, Hurricane Harvey impacted the domestic supply of needle coke (the primary raw material used to make graphite electrodes). This led to the  an increase in graphite electrodes spot prices up to seven times the previous contracted price.

In terms of demand, growth for flake graphite increased by 7.5% each year from 2004-2011. The steel industries rely on the flake graphite and therefore saw a price lift from increased steel demand. Graphite prices peaked in 2012, then fell for the next five years until 2017.

Source: http://northerngraphite.com/graphite-pricing/

Recently, graphite demand increased again due to battery demand (such as lithium ion batteries or vanadium redox batteries, among others).

In fact, graphite demand from lithium ion batteries has grown in six years from essentially nothing to around 130,000 tons per annum, which represents about 30% of the flake market. This battery demand will also support rising graphite demand (and prices).

What is Behind the New Surcharge?

The introduction of a new surcharge for stainless steel came as a surprise to MetalMiner.

Even an increase in graphite prices doesn’t explain the new surcharge, since prices in 2012 were much higher than they are now.

Here are the relevant questions to ask when considering the new surcharge:

  • What percent cost of an electrode is the graphite content? And what is the cost of that graphite per metric ton of steel produced?
  • What percent of the total cost to produce one metric ton of steel does the electrode represent?
  • How does the new surcharge reflect the actual underlying increased costs to produce steel?

To answer the first part of the first question — what percent cost of an electrode stems from the graphite content — we examined data from Graftech, the largest graphite electrode producer. We discovered the following cost breakdown to produce an electrode:

Source: Graftech

Please note the 44% coke represents the graphite portion of the electrode. So, the answer to our question is 44% — that is, the graphite content is 44% of the electrode cost structure.

Now, when we consider the average consumption of graphite in the steelmaking process and the current average price of graphite, we can create a back-of-the-napkin model of the cost of graphite per metric ton of steel produced:

Source: ENTEC. EU Emissions Trading Scheme (ETS)

The average amount of graphite consumed in electrodes on a per-metric-ton basis ranges between 1-5 kg/mt of steel. Our model, therefore, uses an average consumption of 2.5 kg/mt steel for purposes of this cost build-up. The total cost of the graphite per metric ton of steel is $2.75.

Now we need to address the second question: how much of the total cost to produce one metric ton of steel do electrodes represent?

The answer, according to the table below, is $43.22/mt — or 9% of the total cost.

Source: http://www.steelonthenet.com/cost-eaf.html

So, Does the Surcharge Amount Make Sense?

Outokumpu published an electrode surcharge at 30 Euro/mt. Our “should-cost” model results in quite a different number.

Perhaps a bold buying organization will take this into their next mill negotiation to have the mill explain its model in detail.

Are we missing something? Drop us a line at research@metalminer.com. 

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Have you set your 2018 metals budget?

Make sure your purchasing strategy is sound with MetalMiner’s free 2018 Annual Metals Outlook!

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By understanding these price drivers, you can pinpoint exact price levels and make the appropriate changes to your sourcing strategy for that particular metal. You will be also be able to react when the market gives clear signs that a new trend is developing, and stay hedged as long as that trend lasts.

The Annual Outlook Report continues to examine three variables which have underpinned metal markets for the past two years:

  • Demand from China (and China’s overall economic outlook)
  • The strength of the U.S. Dollar
  • Oil prices and trends

While the 2018 Annual Metals Outlook report is free of charge, we do recommend you pair it with a subscription to our Monthly Metal Buying Outlook report in order to get the most valuable, up-to-date information and analysis of market conditions.

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This morning in metals news, the Environmental Protection Agency (EPA) announced it will take steps to repeal the Obama-era Clean Power Plan, copper hit a four-week high and two Russian tycoons are selling a 3% stake in aluminum giant Rusal.

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Obama Initiative to Curb Emissions to be Rolled Back: EPA

The EPA announced Monday that it would begin to take steps to roll back the Obama-era Clean Power Plan, which sought to bring down emissions from power plants, The New York Times reported.

While constituting a loss for the environment, the measure marks a win for industry. (For a review of the costs associated with the plan, our Taras Berezowsky delved into the issue in this 2015 post.)

Scott Pruitt, head of the EPA, made the announcement in Kentucky yesterday.

“The war on coal is over,” Pruitt said, as quoted by The New York Times. “Tomorrow in Washington, D.C., I will be signing a proposed rule to roll back the Clean Power Plan. No better place to make that announcement than Hazard, Ky.”

The repeal proposal will be filed with the Federal Register today. The EPA announced its launch of a review of the plan on April 4.

Copper Bounces Back

After a cooling down in September, copper has hit a four-week high, Reuters reported.

The uptick comes as a function of expected supply shortages in China, according to the report.

Rusal Stake to Be Sold Off

Russian tycoons Mikhail Prokhorov (who also owns the NBA’s Brooklyn Nets) and Viktor Vekselberg are selling a 3% stake in aluminum giant Rusal, Reuters reported.

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The value of the 3% stake is worth $341 million based on Rusal’s closing price Tuesday, Reuters reported.

The Renewables MMI saw a one-point drop for the month, as a number of the metals in the basket trended slightly downward.

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Among the metals dropping throughout the month, Japanese and Chinese steel plate fell. U.S. steel plate dropped as well, falling back 1.1%. U.S. GOES coil also posted a small drop.

Korean steel plate, however, posted a solid increase.

In rare and minor metals, Chinese neodymium fell 4.3%. Chinese silicon also fell, as did cobalt (both by 1.0%).

Rising Renewables

The growth of renewable energy is undeniable — the question continues to be not “if,” but “when.”

Renewable energy is expected to grow significantly in the coming five years.

According to the International Energy Agency, renewable electricity will grow from 23% in 2015 to 30% in 2022. Renewable heat, meanwhile, will rise to 11% from 9%, and biofuels in road transport will grow by a percentage point to 5%.

Pushing Forward

Already, the public and private sectors are being transformed by a push for cleaner energy.

From the government side, a number of nations have made pledges to phase out or eliminate vehicles powered by fossil fuels. The U.K. and France have set a 2040 target date for that goal, while India has set an even more ambitious goal of 2030 (our Sohrab Darabshaw wrote about that last Monday).

As the largest automotive market in the world, China’s recent announcement that it too would consider pursuing similar goals could have a serious impact on the drive toward electric vehicles (EVs), as our Stuart Burns expanded upon last month.

The Courier Mail reported late last month on an energy revolution happening in Queensland, Australia, where farming fields are making way for solar energy stations, in addition to wind farms and pumped storage projects.

According to the report, there were 17 projects under construction that will collectively see $2.3 billion invested (as of the end of June of this year). Now, investment is just investment — those projects, and others like them around the world, have to prove viable for that investment to mean anything. With that said, innovation and implementation can’t happen without investment in the first place, so it’s a good sign for the industry that money is being put into its development (even if it might not have big short-term returns).

Elsewhere, Platts reported on the rise of renewable electricity in the European Union. For example, prices for wind energy have fallen dramatically as competition has intensified — by 50% compared with the previous two years, Platts reported.

The green wave isn’t coming — it’s already here.

China’s Green Goals

China’s recent announcement regarding its own green-energy ambitions has significant implications for the global energy scene, particularly the automotive market. As the world’s largest automotive market, China’s governmental directives have a powerful hand in directing a large share of global demand.

So, by announcing intentions to possibly put a ban on gas and diesel vehicles — as a way to alleviate pollution throughout China — the competition within the EVs industry will further intensify.

As with capacity cuts to production of aluminum and steel, however, many around the world will be taking a wait-and-see approach with respect to Beijing’s recent announcement. Whether China’s words on this matter will translate into action remains to be seen, and a concrete timetable for implementation of this new plan hasn’t been announced yet.

But catering to that forthcoming demand is already underway. As The Guardian reported, Volvo will introduce its first all-electric vehicle in China in 2019.

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The Rare Earths MMI dropped two points for our October reading, falling from 24 to 22.

The heavier hitters in this basket of metals — which is dominated by China — posted price drops.

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Yttrium, terbium oxide, terbium metal, neodymium oxide, europium oxide and dysprosium oxide all fell on the month.

Supply Squeeze

The rare earths sector is already a volatile market — they are rare materials, after all — but Chinese efforts to curb illegal mining have also introduced a supply-side effect on those prices.

China, which overwhelming dominates the global rare earths market, has worked to cut down on supply, which has had a supporting effect on prices.

According to the Nikkei Asian Review, neodymium hovered around $95 per kilogram as of mid-September, a 90% increase from a year earlier and up 80% from the start of the year. Terbium was around $600, up 36% from November last year.

Rare earths, which are used in things like cellphones and computers, are also needed for the production of electric vehicles (EVs). As demand grows for EVs, so too will demand for rare earths. This drive comes governments around the world have set long-terms goals to phase out vehicles powered by fossil fuels, with Beijing’s recent announcement about its own goals potentially presenting a significant impact on the global automotive and energy sectors.

Rare Earths and EVs

Speaking of EVs, one rare earth miner hope to play a big role in their rise.

Martin Eales, chief executive of Rainbow Rare Earths, said the mining company hopes to start producing concentrate by January in Burundi, according to a report in The Telegraph last week.

The company is counting on the rise of EVs to fuel demand for metals like neodymium and praseodymium, which the company mines, according to the report.

Coal Mines to ‘Gold’ Mines

Elsewhere, some are pondering the role old coal mines might have to play in the mining of rare earths.

U.S. Energy Secretary Rick Perry, during a visit to a Pennsylvania mine, talked about anthracite coal as a source for rare earth materials, according to a report by the Pittsburgh Post-Gazette.

As the article states, if researchers can find a way to extract the rare earths contained in the waste rock of coal mines like the one Perry visited, that could be a veritable gold mine — pun intended — for the industry.

Furthermore, if U.S. coal mines can be effectively repurposed in this way, China’s dominance of the rare earths market could possibly be challenged, to an extent.

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