Market Analysis

The Rare Earths Monthly Metals Index (MMI) held flat this month, checking at an MMI value of 22.

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U.S. Looks to Australia for Rare Earths

China’s dominance of the global rare earths market is well-documented, a fact the U.S. defense sector has grappled with in light of the elements’ use in a variety of high-tech capacities (including military applications).

In that vein, the Pentagon announced late last month that it has engaged talks with Australia regarding the possibility of hosting a rare earths processing plant in the country, Reuters reported.

According to the report, China accounts for more than 80% of global processing capacity of rare earths, a list of 17 elements that includes 15 lanthanide series elements (plus yttrium and scandium).

Ellen Lord, the Pentagon’s under secretary of defense for acquisition and sustainment, was quoted as saying that the U.S. is exploring several options to expand its rare earths footprint, of which Australia presented “one of the highest potential avenues,” Reuters reported.

Given the U.S. (and the rest of the world’s) dependence on China for rare earths, the U.S. has held back on imposing tariffs on the elements, even as it has levied hundreds of billions of tariffs on Chinese industrial products and ordinary consumer goods.

Lynas Corp Signs MOU with Western Australia City

Lynas Corp, the Australia firm that holds the title of world’s largest rare earths producer outside of China, last month scored a victory when the Malaysian government opted to extend the miner’s license to operate in the country.

The decision came after many months of uncertainty regarding the prospects of renewal, as the Malaysian government expressed concerns about waste disposal at the firm’s operations.

Although the government extended Lynas’ license, the renewal came in at a term of six months, shorter than the usual renewal period. Lynas reported receipt of the operating license renewal Aug. 22.

More recently, Lynas announced Sept. 6 that it had signed a memorandum of understanding with the Western Australia city of Kangoorlie-Boulder for “the review and due diligence of potential sites” for its new cracking and leaching plant.

“We are very pleased to announce this MOU with the City of Kalgoorlie-Boulder,” Lynas CEO Amanda Lacaze said in a prepared statement. “Kalgoorlie has a rich mining history and continues to work with industry to develop the region and its communities. Lynas already employs graduates from the WA School of Mines which is located in Kalgoorlie and we look forward to continuing this partnership.

“Access to infrastructure and a skilled workforce makes it an attractive investment destination and with this MOU we can further assess the suitability of potential sites in Kalgoorlie for our Cracking & Leaching plant.”

In other Lynas news, the company announced Australian conglomerate Wesfarmers would not continue to pursue a potential takeover bid initially announced in 2018.

Wesfarmers issued a proposal to purchase Lynas for $2.25 per share in March, conditional on several factors that included the renewal of the rare earths producer’s Malaysian operating license.

However, Lynas announced Aug. 22 that Wesfarmers did not intend to progress with its proposal.

“Wesfarmers remains focused on delivering value to its shareholders through disciplined capital allocation within our divisions and when considering new investments,” Wesfarmers Managing Director Rob Scott was quoted as saying.

In April, Lynas’ board rejected a $1.1 billion takeover bid from Wesfarmers.

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Actual Metal Prices and Trends

The Chinese yttrium price fell 4.0% month over month to $31.37/kg as of Sept. 1. Terbium oxide fell 3.6% to $547.27/kg.

Neodymium oxide rose 4.6% to $45,036.70/mt.

Europium oxide dipped 4.0% to $30.68/kg. Dysprosium oxide fell 1.4% to $266.32/kg.

The Construction Monthly Metals Index (MMI) dropped one point for a September MMI reading of 77.

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U.S. Construction Spending

According to the U.S. Census Bureau, U.S. construction spending in July totaled $1,288.8 billion, up 0.1% from the revised June estimate of $1,288.1 billion.

The July spending figure, however, marked a 2.7% year-over-year decline, down from $1,324.8 billion in July 2018.

Broken down by type, spending on private construction reached a seasonally adjusted annual rate of $963.1 billion, down 0.1% from June’s $963.7 billion.

Within private construction, residential construction reached $506.7 billion in July, up 0.6% from June’s $503.5 billion. Nonresidential construction came in at $456.4 billion in July, down 0.8% from June’s $460.2 billion.

Meanwhile, in public construction, the estimated seasonally adjusted annual rate of spending was $325.7 billion, up 0.4% from the revised June estimate of $324.3 billion. Within public construction, educational construction reached $73.3 billion, an increase of 1.6% from the revised June estimate of $72.1 billion. Highway construction checked in at $97.0 billion, down 2.7% from the revised June estimate of $99.7 billion.

Architecture Billings Essentially Flat

The Architecture Billings Index, put out by the American Institute of Architects, posted another flat performance in July.

The ABI, which measures billings at architectural firms, checked in at 50.1 in July (anything greater than 50 indicates growth). The reading marked an increase from the previous month’s contractionary reading of 49.1.

Despite the nominal growth this month, the reading marks a growing trend this year.

“Business conditions at architecture firms remained essentially flat for the sixth consecutive month in July,” the ABI report states. “Although the ABI score of 50.1 for the month technically indicates growth, the score is barely above 50, which means that the share of firms that reported increasing firm billings for the month is just slightly higher than the share that reported decreasing billings. Overall, this six-month stretch is one of the longest periods of essentially flat billings since the end of the Great Recession.”

Broken down by region, the West led the way this month with a reading of 51.2, followed by the Midwest (48.9), South (48.3) and Northeast (48.3).

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Actual Metal Prices and Trends

Chinese rebar dropped 12.0% on a year-over-year basis, down to $507.53/mt as of Sept. 1. Chinese H-beam steel dropped 3.5% to $538.21/mt.

U.S. shredded scrap steel jumped 14.4% to $294/st.

European commercial 1050 aluminum sheet rose 1.2% to $2,393/mt.

Chinese 62% iron ore PB fines fell 4.0% to $73.20/dmt.

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The Automotive Monthly Metals Index (MMI) fell one point this month for a September MMI reading of 85.

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U.S. Auto Sales

General Motors continues to report on a quarterly basis; in July, the automaker reported its second-quarter deliveries were down 1.5% on a year-over-year basis.

Similarly, Ford Motor Co. is scheduled to announced its third-quarter earnings Oct. 23.

Fiat Chrysler has also moved to quarterly reporting, with its first quarterly report coming out Oct. 1.

Meanwhile, August proved to be a record-setting month for Honda in the U.S. Honda sales surged 17.6% on a year-over-year basis, setting four all-time monthly sales records in the process, including for its model CR-V and Passport models. Car sales were up 19.8%, while truck sales increased 16%.

Toyota Motor North America also reported a strong month, with overall sales up 11.3% on a volume basis and 7.4% on a daily selling rate basis. The Toyota division notched their best-ever August sales figure, rising 12.3% on a volume basis, while Lexus division sales increased 4.6% on a volume basis.

Nissan saw its August sales jump 13.2% compared with August 2018.

A joint forecast by J.D. Power and LMC Automotive indicated total August vehicle sales were expected to reach 1.62 million units, up 5.0% from August 2018.

“August will be a blockbuster month for the industry,” said Thomas King, senior vice president of J.D. Power’s data and analytics division. “Sales are expected to post the largest year-over-year gain since December 2016. Strong volumes coupled with higher average sales prices means that consumers will spend more purchasing new vehicles in August than any month in history.”

However, King noted that reported figures for August also include prolific Labor Day weekend sales.

“Rising manufacturer incentives are contributing to August’s strong results, but the industry sales reporting calendar is primarily behind the large gains,” he continued. “This year, the Labor Day holiday will fall within the time period manufacturers use to report August sales, unlike typical years when the Labor Day weekend falls into September sales results. Labor Day is one of the most heavily shopped periods of the year, with consumers motivated by heavy discounts on outgoing model-year vehicles and new 2020 model-year vehicles arriving in showrooms. Last year, more than 237,000 vehicles were sold during the Friday-Monday holiday period.”

United Auto Workers Members Vote to Authorize Strikes at Big 3

Earlier this week, the United Auto Workers union announced its members had voted overwhelmingly in favor of authorizing a strike, thus giving the union’s president and executive board the authority to call for a strike if contract negotiations with the Detroit Big 3 fail.

“No one goes into collective bargaining taking a strike lightly. But it is a key tool in the tool belt as our bargaining team sits across from the company,” UAW President Gary Jones said. “Ultimately, the company holds that destiny in their hands as they bargain. Clearly the UAW stood up for them in a very dark time, now that they are profitable it is time for them to stand up for all of us.”

According to the UAW, the vote percentages in favor of authorization checked in at:

  • FCA: 96%
  • Ford: 95.98%
  • General Motors: 96.4%

On Tuesday, the UAW announced it had selected General Motors to begin the negotiating process.

“Mary Barra said from the outset of these talks that we will stand up as we tackle a changing industry,” Jones said of the GM CEO. “We are ready to stand strong for our future.”

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Contracts with the Big 3 automakers expire Sept. 14.

Actual Metal Prices and Trends

U.S. HDG rose 2.8% month over month to $836/st as of Sept. 1.

LME primary three-month copper dropped 5.3% to $5,637/mt. U.S. shredded scrap steel jumped 14.4% to $294/st. Korean 5052 aluminum coil premiums fell 1.0% to $3.12/kg.

Zerophoto/Adobe Stock

India’s growth rate has slowed, which in turn means sluggishness in the manufacturing sector.

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All of the above means lower consumption of steel.

Riding on these developments comes the news that domestic steel producers are sitting on a “larger than usual” steel inventory.

A report in the Business Standard quoted Sushim Banerjee, director general at the Institute of Steel Development Growth, as saying steel inventories are at “alarming” levels of 35 days rather than the more typical 21 days.

The total steel inventory of all primary producers in India is at 2 million tons, up from the more typical level of 1 million tons, according to the Business Standard. Because of such high inventory, domestic prices have fallen by about 20% since April.

Ratings agency Fitch Solutions has revised its 2019 global steel price forecast downward to an average of U.S. $600 per ton from $650, citing weak investor sentiment, the ongoing U.S.-China trade war and uncertainty surrounding the U.K.’s Brexit effort, the Business Standard reported.

Nikunj Turakhia, director at the Steel Users Federation of India, was quoted as saying domestic steel prices were close to the bottom and hoped they would start rising soon.

There is more bad news for Indian steel companies.

Ratings agency India Ratings and Research has revised its outlook on the steel sector to “stable-to-negative” from “stable” for the remainder of this fiscal year. One of the reasons for the downgrade is sluggish demand. The rating agency has also revised downwards its fiscal year 2020 steel demand growth expectation to around 4% from the previous forecast of 7%.

All of this comes as global crude steel production rose by 1.7% in July, with Indian steel production increasing by the same percentage.

Tata Steel has announced a closure of some of its operations in the U.K., which could lead to a loss of about 400 jobs.

It has not been a good year for many steel companies in India; for example, Tata Steel Ltd’s first-quarter profit slumped to its lowest level in more than two years.

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India’s S&P BSE Metal Index has fallen by about 30% so far this year due to the slowdown in the economy and infrastructure.

Zerophoto/Adobe Stock

India is almost on the cusp of this year’s festival and wedding season, but the domestic bullion market remains subdued, contrary to historical norms.

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The reason? Gold prices in India have rallied 20% this year based on several internal and external factors, Livemint reported.

Over the past week, spot prices touched a high of U.S. $558.45 (Rs 40,000) per 10 grams. The futures market showed a similar trend, though prices later dropped. Gold futures had hit a record high of U.S. $543.44 per 10 grams (Rs 38,666).

The Livemint report said the spread between MCX and international prices narrowed on Tuesday from near $51/ounce to about $42/ounce, sparking some buying interest in the physical market. But even then, the higher domestic price and higher taxes continued to dampen demand.

Bullion experts forward many reasons for the highest-ever spurt in gold prices, including: a hike in import duty, the weaker rupee versus the U.S. dollar, the ongoing U.S.-China trade war, the U.K.’s impending Brexit and buying by global central banks.

India’s gold imports this July fell by 55% from a year ago, down to a three-year low, Yahoo Finance reported.

The gold scene in most of Asia is equally depressing.

News agency Reuters reported steep prices prompted Asian consumers to sell back physical gold for profit this week.

Some amount of buying, even at the current price range, did happen because of gold’s appeal as an instrument to hedge against risk.

In China, the biggest gold consumer in the world, premiums eased slightly to $6-$9 per ounce over the benchmark, down from $9-$10 last week.

The Reuters report quoted Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong, as saying interest was mostly from the investment side.

In India, dealer discounts of up to U.S. $33 an ounce over official domestic price saw some amount of buying activity. Most dealers, however, were not in the mood to place new orders, preferring to wait and let the situation unfold, according to the Economic Times.

Almost everyone is waiting for a price correction, which is a far cry from the positive situation at the start of 2019.

Demand grew 9% from January-June this year, sparking hopes that consumption towards the latter half of the year would go up.

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But experts are of the opinion that if things do not improve soon, consumption could slump to a low of over 650 tons (comparable to the 2016 low).

Zerophoto/Adobe Stock

All indicators seem to show that India may end up being a net importer of steel for the second consecutive year in fiscal year 2020, according to sector experts and ratings agencies.

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The reasons underpinning this development are many.

In a desperate attempt to quell the import tide, the Indian government is said to be actively looking at imposing even more safeguard duties on steel imports. These are reported to be at an advanced stage at India’s Directorate General of Trade Remedies (DGTR), the government body in charge of recommending safeguard duties. In addition, the government is being pressured by the Indian steel lobby (which is led by the large representative body of steel companies, the Indian Steel Association).

The first signs of India continuing to be a net importer this year, too, came from figures out for the April-July period of this fiscal year.

A report by CARE Ratings showed the imports of finished steel products exceeded exports by 1 million tons, according to the Business Standard. Steel exports from India in the period under review declined by 23.4% to 1.5 million tons. Despite a 6% fall, imports of finished steel products remained high at 2.5 million tons, per the Business Standard.

According to another research agency, India Ratings and Research (IRR), the fundamentals of the domestic steel sector are likely to weaken in the current 2019-20 fiscal year (ending March 31, 2020), which includes the risk of softening of prices, elevated raw material prices and weak demand, Argus reported.

Experts say additional safeguard measures imposed on imported steel products by the European Union (E.U.) have dented Indian exports to the trading bloc. E.U. nations like Italy, Belgium and Spain accounted for 5-12% share in India’s total finished steel exports in fiscal year 2019.

In fiscal year 2019, India imported around 3.1 million tons of steel from the Republic of South Korea, followed by 1.8 million tons from China and 1.2 million tons from Japan.

One more worry for Indian steel companies is the plummeting of global iron ore prices. From a five-year high of $121 per ton in July, spot iron ore prices have fallen to $93; iron ore prices are expected to fall further.

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According to the IRR, one area to watch out for is the auction of local ore mines scheduled for March 2020. If there is any delay in the auction schedule, it would lead to a disruption of local steel production.

President Donald Trump’s suggestion that the U.S. could buy Greenland from Denmark was met with incredulity in Nuuk, Copenhagen and across Europe.

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“Greenland is not for sale. Greenland is not Danish. Greenland belongs to Greenland. I strongly hope this is not meant seriously,” Greenland Prime Minister Mette Frederiksen said during a visit to the territory on Sunday, as reported by The Times.

The prime minster added, “Thankfully, the time where you buy and sell other countries and populations is over. Let’s leave it there. Jokes aside, we will of course love to have an even closer strategic relationship with the United States.”

Frederiksen is said to have rejected Trump’s proposal, describing the notion of selling Greenland as “an absurd discussion.”

Strangely, Trump seems to have taken affront that the 58,000 population of Greenland did not want to be bought and sold like chattels. He then tried to lean on Denmark by commenting on how the U.S. protects Denmark and, as a result, should be more willing to sell its semi-autonomous territory (Greenland governs itself but relies on Denmark for its defense and foreign policy).

After being flatly refused by both Nuuk and Copenhagen, President Trump reacted in an apparent fit of pique, canceling his planned trip to Denmark next month.

Crass as the handling of this idea has been, it is not the first time the U.S. has tried to buy its massive neighbor.

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British Steel is still limping along, losing £5 million a week while it continues looking to secure a buyer.

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After reporting on the group entering into the Official Receiver’s hands in the spring we have been following its ups and downs in the expectation that eventually the most likely bidder would be Britain’s largest steel producer, Liberty House, owned by steel entrepreneur Sanjeev Gupta. The group already owns several other steel assets in the U.K. and mainland Europe.

While Liberty House appeared to be the frontrunner, it seems to have been sidelined in favor of a more controversial bidder: Turkish pension fund Oyak.

The bidder is controversial because Oyak oversees the Turkish military’s $15 billion pension fund. While Turkey was seen as a key NATO ally of the west a decade ago, it has slipped into increasingly nationalistic and antagonistic rhetoric under autocratic leader Recep Tayyip Erdoğan. Clearly, Oyak will be close to both the military in Turkey and the government of President Erdoğan, and has come under criticism from labor unions back home in Turkey.

Oyak recently closed Chemson, a Wallsend-based firm that makes additives used in the production of PVC plastic, moving production to Austria and Turkey at a loss of 64 jobs.

Last week, it announced it would cease production at the site by the end of September, the Guardian reported, raising fears that a successful bid for British Steel could likewise be followed by a hollowing out of jobs as the new owners drive for profits.

But are such fears well-founded?

British Steel has struggled to make a profit and is badly in need of further investment if it is to survive. Indeed, the reason Oyak is preferred over Liberty is the latter has been quite clear that it would close one of Scunthorpe’s blast furnaces and use metal from another of its steel mills in Yorkshire, with the loss of many more jobs than the few hundred Oyak proposes.

Oyak, on the other hand, is looking to raise production. Last year, Scunthorpe produced 2.8 million tons, but the new buyer has plans to raise production to 3 million tons and, eventually, 3.2 million tons, according to the Financial Times. It also intends to dramatically improve productivity, said to be woefully poor by European standards.

Oyak is not new to steelmaking. The fund owns 49.3% of Turkey’s largest steelmaker, Erdemir, as well as a sprawling range of mining and manufacturing assets ramging from automotive to cement (in addition to steel).

Oyak’s plans for British Steel are a double-edged sword.

On the one hand, it wants to preserve and indeed expand production, which will find widespread support in the U.K.

On the other hand, it is coming cap in hand to the British government looking for contributions to improve the steelmaker’s carbon footprint.

The plan is to move from coal to gas-powered blast furnaces and eventually — and most controversially, because it has not been done at scale before — to hydrogen, taking the company to a near-zero carbon footprint.

Oyak said it plans to invest some £900 million in the plant (although over what time frame that investment will come is unclear), but a figure of £300 million from the government has been reported as the sum it is looking for.

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Why Oyak is planning to do this in the U.K. and not at home with Erdemir is a question; the cynic would suggest it know the economics of such a move are shaky but believes the British government may be more up for taking a punt than the authorities back home.

At present, any contribution would have to be on the basis of commercial loans if the U.K. is to avoid falling afoul of E.U. subsidy legislation — although whether the U.K. would be subject to that post-Brexit remains to be seen.

Various sources are reporting both a slowing in demand growth and a fall in output for primary aluminum. So far this year, that combination has been led by a faster fall in output, pushing the market into a larger deficit position as the first half progressed.

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Reuters reported the results of a poll showing a forecast for a global aluminum deficit of 550,000 metric tons this year — down from an earlier estimate of 868,240 tons — as demand growth has recently slowed.

Inventory levels support estimates of a deficit.

Primary inventories in warehouses tracked by the Shanghai Futures Exchange (ShFE) are hovering at their lowest since April 2017, according to Reuters. LME stockpiles have improved recently, but are still down 22% from the beginning of the year.

Not surprisingly, futures markets in China are showing more resilience to a generally depressed commodities sector. The ShFE’s most-traded aluminum contract is at its highest since May 29, hitting 14,285 yuan ($2,022.02) a ton last week before easing to close at 14,200 yuan a ton.

The LME, on the other hand, has continued to drift lower over the last two weeks after failing to hold above $1,800 a ton in July.

The disparity in outlook is down to the domestic production situation in China.

New smelter startups have been delayed as Beijing is taking a hard line with aluminum producers, forcing those keen to open up new capacity to close corresponding capacity at older, less efficient plants. Summer production has at best been flat and first-half production is marginally down from last year’s level.

Investors have been encouraged as Typhoon Lekima stormed over Shandong province, causing widespread flooding. Although there are no reports yet of aluminum outages as a result of the typhoon, the expectation is some smelters will suffer flooding and/or power failures, resulting in lost production.

Consumption, however, is softening, both in China and the rest of the world.

Weaker automotive production is a significant factor, as trade worries are causing just that — worries — rather than a significant downturn in non-automotive consumption so far. Expectations are for a pickup in Chinese domestic primary production this fall as the impact of the flooding wanes and those delayed startups come onstream.

Meanwhile, consumption is expected to soften further in Europe and Japan as both areas flirt with stagnation at best or, possibly, outright recession (being the only remaining mature markets open to China after tariffs essentially shut off the U.S. market).

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The prospects this year for a rise in aluminum prices remain poor. However, if demand holds up and supply continues to be constrained, it could set the scene for a gradual rise next year, particularly if a resolution to the trade war is miraculously agreed.