Market Analysis

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:

Palladium prices hit 2-year high. Source: MetalMiner analysis of stockcharts.com data

Global Demand for Cars

Eighty percent of palladium demand comes from cars. China has the largest auto market, followed by the United States. Therefore, car sales in these two countries are very important for palladium’s demand outlook.

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Car sales in the U.S. fell short of expectations in March, down 1.6% compared with March 2016. After two years of record sales, the auto industry seems to have hit a plateau. The U.S. industry might have to come up with discounts and incentives to continue to increase sales.

US total vehicle sales. Source: tradingeconomics.com

Car sales in China rose 13.7% in 2016 compared to 2015. The astonishing performance of China’s auto market helped boost palladium prices last year. Sales are still running strong this year but not at the same pace as last year. According to the Wall Street Journal, sales of vehicles, excluding those typically used for commercial purposes, rose 1.7% to 2.1 million units in March from a year earlier.

Weaker sales-tax incentive 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 Resistance Levels

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

Palladium prices have risen steadily since the beginning of 2016, but the metal is now trading at historically high levels, which could play against this rally. Historically, palladium has peaked in the range of $850-$900. Prices closed last week at $827.

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This doesn’t mean that prices will necessarily peak at these levels again, but we suspect that the closer prices get to those levels, the stronger the fundamentals will need to be to lure investors to chase prices higher.

What This Means For Metal Buyers

Palladium’s outlook continues to look good, but a potential slowdown in global auto sales and stiff price resistance near $850-$900 could put a ceiling to palladium’s rally this year.

Industrial metals have been on a tear since we called a bull market just about a year ago. However, we have recently witnessed some price weakness over the past couple of months.

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Commodities like industrial metals are cyclical assets which tend to run in the same direction for long periods of time. The key is to recognize the peaks and valleys of the cycle to time your purchases accordingly. 

The industrial metals ETF: peak or pause? Source: MetalMiner analysis of @stockcharts.com data.

The ongoing bull market in industrial metals has run for over a year and while some metals are experiencing some setbacks, it’s a good time to bring up the question: Are we nearing a peak or this is just a pause before prices break on the upside?

To answer this question, let’s look at what the main macro drivers are telling us:

China: Strong Indicators

As we all know, China is the world’s largest producer and consumer of industrial metals. Any changes on China’s supply and demand equation can have a huge impact on the price of metals. The performance of Chinese stock markets are a great gauge of investors’ sentiment on China’s economy. Since China became a major economy, we’ve seen a strong correlation between Chinese markets and metal prices.

Chinese stock market etf trading near highs. Source: MetalMiner analysis of @stockcharts.com data.

Price momentum in Chinese markets has indeed picked up this year, tradin near a two year-high. The latest economic indicators continue to increase investors’ confidence in China.

China’s GDP came at 6.9% in the first quarter, the fastest pace in almost two years, up from a 6.8% growth in the previous quarter and putting the country well ahead of its goal of 6.5% annual GDP. Chinese investment in buildings, factories and other fixed assets rose 9.2% for the first quarter while construction starts surged by 11.6%. If that’s not enough, in April, China’s government announced plans to build a new megacity, which will increase the demand for steel and other industrial metals.

This growth translates into solid demand for industrial metals at the same time that China applies stricter anti-pollution rules and supply-side reforms designed to cut capacity in energy-intensive sectors like steel and aluminum. Overall, while we continue to see strength in Chinese markets, we are not ready to call peak in this industrial metals bull market.

US Dollar Falls to 5-Month Low

Base metals are commodities and, as such, move in opposite directions to the dollar. Over the past 20 years, every major bottom in commodities have coincided with a major peak in the U.S. dollar and vice versa. For a continuation of a bull market in industrial metals we should see weakness in the dollar. This year we have seen that.

The U.S. dollar index falls to a 5-month-low. Source: MetalMiner analysis of @stockcharts.com data.

According to the Wall Street Journal, on Monday, “the dollar fell to a five-month low due to a surge in the euro after the first round of the French presidential election eased concerns about the future of the European currency.” The notion is that the Euro would likely strengthen if Macron wins the election.

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If centrist candidate Emmanuel Macron gets elected in the final round (May 7), markets might start to focus on a positive European economic picture and its higher growth relative to the U.S. That could potentially devalue the dollar against the euro, a bullish development for industrial metal prices.

What This Means For Metal Buyers

Industrial buyers need to watch closely for signs of a market top. For now, the recent price weakness in industrial metals seems normal in the context of a bull market and key indicators such as China and the dollar favor a continuation of this uptrend. Industrial buyers should continue to manage their commodity price risk exposure until we see real signs of a market peak.

Tin prices have rebounded since March. Prices fell sharply earlier this year but they have now found stability in Q2. As we pointed out in February, that month presented a good opportunity to buy tin. During bull markets, it’s good to time your purchases after a price pullback.

Tin prices bounce off support levels. Source: MetalMiner analysis of LME data.

Indonesian Exports Up

According to the ITRI, Indonesian tin exports for 2016 fell 9.4% compared to 2015 as Indonesia tightened its rules for tin exports.

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However, the export permit process has been far smoother this year. For the first quarter, exports were up by 3.1% compared to the final quarter of 2016, and up 86% from the same quarter of last year. According to the International Tin Research Institute, many smelters in the country are operating on tight margins, with some understood to have temporarily halted production when prices dropped below US$19,000/mt in February before resuming when prices recovered above $20,000/mt. ITRI expects Indonesian refined shipments this year to remain broadly level with 2016. The next few months figures will give as a clearer picture on how much metal Indonesia will export this year.

Myanmar Shipments Fall

According to the ITRI, Myanmar was the source of over 99% of China’s reported tin ore and concentrate imports in January and February, which totaled exactly 40,000 mt, down 51% from 81,077 mt for the same period of 2016.

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Sales of concentrates stockpiles at the beginning of the quarter explain why shipments fell. In addition, the Chinese Spring Festival also impacted numbers. For these reasons it seems too early to tell whether exports will continue to decline or not but ITRI expects exports to be limited in 2017.

What This Means For Metal Buyers

Tin’s performance for the balance of 2017 will strongly depend on the production levels of these two Asian countries. For now, supply seems to be limited while most established producers are struggling to maintain production. Meanwhile, the demand outlook for the whole industrial metals pack looks stronger than expected, which should provide a floor to prices this year.

Zinc prices have fallen sharply over the past two weeks.

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While others panic and see this decline as the end of zinc’s bull run, I see this price pullback as a great opportunity to purchase the metal at a good price.

The 3-month LME zinc price. Source: MetalMiner analysis of LME data.

After doubling in price since the beginning of 2016, prices are now struggling in the $3,000 per metric ton level. However, the price weakness seems to come from long position buyers exiting those positions rather than shorts coming to the market. This suggests that sentiment hasn’t shifted to bearish for now. At the same time, we see strong support near $2,500/mt, which could provide a good opportunity to time purchases.

Short-Term Resilient Supply but What About Long-term?

The recent price weakness can be attributed to fears that high prices could trigger more mine supply to come online in China. Refined zinc supply remains resilient in the country. For the first two months, zinc refined output rose by near 4.5% compared to the same period of last year. However, supply might prove less resilient in the coming months.  Some of China’s largest zinc smelters recently announced they will curtail roughly 540,000 mt of annualized capacity over an unspecified period of time. The announcement comes after China’s largest zinc smelter, Zhuzhou, started an indefinite maintenance period for 100,000 mt of smelting capacity earlier in March.

In addition, according to a recent Reuters article, the second-largest zinc plant in North America has been running at 50% of normal operating levels due to a strike that started on February 12. The plant produces around 270,000 mt of zinc per year.

China’s Demand Still Strong

Other analysts might be attributing the recent price weakness to slowing Chinese demand. That really hasn’t been the case. China’s GDP came at 6.9% in the first quarter, the fastest pace in almost two years, up from 6.8% growth in the previous quarter putting the country well ahead its goal of 6.5% annual GDP.

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Construction and infrastructure make up for more than 60% of zinc’s demand. According to Global Finance, Chinese investment in buildings, factories and other fixed assets rose 9.2% for the first quarter while constructions starts surged by 11.6%. In addition, China announced intentions to build a new megacity, which will significantly increase the demand for industrial metals such as zinc

What This Means For Metal Buyers

Despite recent price weakness, zinc’s fundamentals remain strong. It seems way too early to call an end of zinc’s bull run. This month buyers might find a good opportunity to purchase zinc. You can check out our monthly metal buying outlook for monthly strategies on how to time your purchases.

Coking coal has more than doubled in a matter of days as a cyclone caused disruptions to Australia’s coal exports. The impact was significant and several miners had to declare force majeure on their coal deliveries.

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It is estimated that shipments accounting for 50% of the global coking coal supply will be delayed and that Australia will need at least two months to regularize its coking coal exports after the natural disaster.

Australian coking coal’s free-on-board price in US dollars per metric ton. Source:mining.com.

Coking coal prices rose sharply in the second half of last year when China reduced allowable work days at the country’s coal mines, which reduced output and tightened the global coking coal market. These events added fuel to rising steel prices in China. But a slump in coking coal prices since December added pressure to steel prices, especially in China since the country strongly depends on the commodity to make steel.

Can Higher Coking Coal Prices Give a New Boost to Chinese Steel Prices?

The Chinese cold-rolled coil price. Source: MetalMiner IndX.

A recent CNBC article states that Australia is the world’s biggest coking coal exporter and therefore, China’s largest supplier. The recent disruptions are forcing China to look for alternative supplies such as Russia, Mongolia or Indonesia. In addition, China won’t import more coking from North Korea as a punishment to recent North Korean missile tests.

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Higher coking coal prices translate into higher input costs, particularly in China. Chinese steel prices set the floor for international steel prices, a topic that we discussed recently. Steel buyers should monitor the recent surge in coking coal prices closely since steelmakers will potentially pass on the increase to consumers, giving a boost to weakening steel prices in China.

Since the beginning of March, steel prices in China have fallen sharply while prices in the U.S. have risen. That is simply not sustainable.

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These price divergences happen once in a while but they don’t last long. Over the next few weeks we’ll either see a rebound in Chinese prices or weakness in US steel prices.

US HRC (in blue) vs. Chinese HRC (in purple). Source: MetalMiner IndX.

Why do we say this? Well, China’s output accounts for more than 50% of world steel production. Currently, China isn’t a major exporter to the U.S., but it is the biggest exporter to the rest of the world. Therefore, Chinese prices put a floor under international steel prices.

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Since prices peaked in February, China’s hot-rolled coil prices have fallen nearly 15%. During the same period, U.S. HRC prices have risen nearly 8%. Interestingly, we saw a similar divergence last summer, when the U.S. imposed strong anti-dumping measures against imports. Such a wide international price arbitrage didn’t last long, as we predicted last year, this price arbitrage narrowed after that summer.

CRC price arbitrage US-China. Source:MetalMiner IndX.

U.S. steel prices are now expensive again relative to Chinese prices. In the case of cold-rolled coil, the price spread stands now at $344 per metric ton, quite high compared to historical levels and not far from last summer’s peak of $420 per mt. A level that has proven unsustainable before.

What This Means For Metal Buyers

We continue to be long-term bullish on steel markets. However, buyers should closely monitor the recent divergence between Chinese and US prices. We should see a recovery in Chinese steel prices soon, otherwise US steel mills will have a hard time justifying further price hikes. Remember that we are in a global world and although US steel prices can temporarily move apart from Chinese prices, they will eventually move in tandem because otherwise, buyers will start looking to buy steel overseas.

Palladium has been the best performer among precious metals for some time now. Since the beginning of 2016, palladium is up 65%, easily beating the price increases seen in platinum, gold and silver.

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What factors made palladium outperform its peers and what should palladium buyers pay attention to this year?

Global Demand for Cars

According to Inside Advantage’s Outlook 2016 report, “the primary bullish factor might be the expansion of auto catalyst demand for palladium, particularly in China where air pollution problems are increasing. The auto sector accounts for around 80% of palladium demand.”

Chinese car sales for the first two months of 2017 beat expectations and were 8.8% higher compared to the same period in 2016. According to a Market Watch report, the pace is still weaker than the 14% increase reported last year by the industry as tax incentives urged customers to buy cars. In Q4 of 2016, China announced a 50% cut in its sales tax from 10% to 5% for small automobiles. The tax cut was effective until the end of 2016.

Most analysts were expecting a big slowdown in the largest automobile market this year, but China continues to surprise markets. The country agreed to extend the cut, although at a higher rate of 7.5%. In 2018 it will revert to 10%. Therefore, while auto sales might not beat the high levels reached last year, Chinese citizens will still likely take advantage of a lower tax in 2017.

According to a recent Reuters article, “March’s figures for the world’s second-largest automotive market came in below market expectations and gave early evidence that the growth in America’s car sales may be running out of steam. Sales in March fell by 1.6% compared with the same month a year ago.”

Overall, auto markets were really strong in 2016, contributing to a 50% rise in palladium prices last year. This market might surprise again in 2017 but signs of a plateau in the U.S. and uncertainties in China due to an extended but higher tax cut are factors to watch this year.

Strong South African Currency

South African Rand Index. Source:MetalMiner analysis of @stockcharts.com data.

South Africa is the largest producer of palladium, and controls around 40% of world output. The Rand (South African currency) has been one of the best performing currencies since 2016. A rising Rand makes South African exports more expensive to the rest of the world, limiting producers margins and potentially leading to a reduction of output. Read more

Global steel prices tend to find a floor based on the price of Chinese steel. If Chinese prices fall, domestic U.S. prices also tend to fall. However, grain-oriented electrical steel continues to beat to its own drum, often not aligned with underlying steel prices.

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March is no exception.

Although U.S. domestic steel prices continued to rise in March, the GOES M3 price fell and fell rather significantly dropping by nearly 7%.

GOES MMI

Meanwhile, according to a couple of recent TEX Reports, GOES prices from Baosteel increased by $38/metric ton in April after increases of $168/mt from January through March. Baosteel acts as the price leader and according to a recent report, and will likely stand pat until or unless others also increase their prices. Those “others” may have a near-term opportunity to do so as a large tender from Bharat Heavy Electricals for 20,000 mt will bring in the global GOES producer community. As China tends to set the “market floor” for global steel prices, the TEX Report suggests that this tender will serve as the global price floor for GOES for the balance of 2017.

Supporting the rising price theory, TEX Report also suggests that prices have risen by $200-300 per mt in the Middle East and India.

Ironically, prices for steel rebar on the Shanghai Futures Exchange have declined by 5% according to a recent MetalMiner story on the back of declining coking coal (4%) and declining coke prices (5%), as well as falling iron ore futures. Some, including MetalMiner, believe the price declines are due to speculators unwinding bullish bets.

Chinese HRC

Source: MetalMiner Forecasting

Regardless, Chinese prices for hot-rolled coil are falling and though GOES prices often diverge from underlying steel market trends, upward price movements may be elusive.

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Copper prices continued to trade flat in March. Over this month, strikes at major mines Escondida and Cerro Verde ended while Freeport-McMoran got a temporary export permit for its Grasberg mine.

Escondida’s Strike Ends

The strike at the world’s largest copper mine, Escondida in Chile, ended in the final week of March. The strike had lasted 44 days, longer than expected.

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The mine is not rushing to ramp up back to prestrike output levels. Owner BHP Billiton has said will outline the impact of the strike on Escondida’s output in results due for release on April 26. The strike is estimated to have cost Escondida more than 200,000 metric tons in copper production.

Copper MMI

Workers at the mine voted to return to work, despite not having reached an agreement on a new pay deal with management. Instead, workers extended their existing contract by 18 months, losing out on a new signing bonus or wage increase, but they will be able to renegotiate a new deal in 2018 after a new pro-union Chilean labor law goes into into effect.

Cerro Verde Mine Resumes Operations

Cerro Verde, Peru’s largest copper mine, had been operating at 50% of capacity since workers initiated a strike on March 10. At the end of the month, workers signed an agreement as the union accepted the company’s offer to improve family health care benefits and pay workers their portion of the mine’s profits earlier than usual. The mine produced just under 500,000 mt of the red metal last year.

Grasberg Mine Gets Temporary Export Permit

Freeport-McMoran was granted a temporary permit to export copper concentrates from its Grasberg mine in Indonesia, the world’s largest gold mine which also produces copper. The new permit broke a 12-week deadlock that had cut supply to Asian smelters. The new export license will last eight months. The amnesty means the company can renew deliveries of copper concentrates in Asia after declaring force majeure in February, but longer-term discussions over the company’s rights in Indonesia have yet to be determined.

What This Means For Metal Buyers

Copper supply disruptions have lasted longer than expected. Although they seem to have come to an end, their impact on supply still need to be outlined. In addition, these strikes have set the case for wage negotiations across the industry.

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Some major contract negotiations in large mines are due in the coming months. In the meantime, copper investors might focus their analysis on macro factors such as the ongoing China-U.S. trade negotiations, the performance of the U.S. dollar and global demand for industrial metals.

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China is now home to two-thirds of the world’s solar-production capacity.

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The efficiency with which China’s solar products convert sunlight into electricity is increasingly close to that of panels made by American, German and South Korean companies. Because China also buys half of the world’s new solar panels, the country now effectively controls the panel market.

Renewables MMI

A recent New York Times article details the meteoric rise of China’s solar industry and how its dominance in growing markets complicates the Trump administration’s attempts to cut down the U.S. trade deficit with China. China’s policy shifts and business decisions now have global impact on solar prices and production, particularly of crystalline polysilicon photovoltaic panels, everywhere else in the world.

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Now that China is cutting subsidies that it offers to panel manufacturers there, the ripples are being felt by installers in the U.S. and elsewhere. China’s solar-panel makers have recently cut their prices by more than a quarter, sending global prices plummeting. The NYT reports that Western companies have found themselves unable to compete. They have cut jobs from Germany to Michigan to Texas and the account includes the case of Russell Abney, a 49-year-old equipment engineer from Perrysburg, Ohio. The American panel manufacturer he worked for laid off Abney, among others, to remain competitive after China yanked its subsidies and manufacturers there lowered domestic prices to compensate.

If China’s dominance of solar panel manufacturing remains, able to move markets and cause layoffs worldwide depending on which subsidies are continued and which are scrapped, then the solar panel silicon market is likely to remain in the low-price rut we’ve documented in the Renewables MMI since 2012.

The Renewables MMI fell one point to 54 this month.

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