Market Analysis

Stock markets in New York, London and Shanghai have been sliding for a month now since President Donald Trump unleashed a trade war on the U.S.’s trading partners in an effort to reset terms seen as unfair by Washington.

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Normally, as stock markets slide and tensions rise, you would expect to see the gold price rise; the precious metal is considered a safe-haven asset because it retains or increases value during market turbulence.

Gold is often sought after by investors through economic uncertainty in order to limit their exposure to losses in other assets. Yet, currently gold is at or near a seven-month low, according to Reuters. According to the Singapore Business Times, for the first time in two years, Schroders has cut its global growth forecast for 2018 and 2019, citing rising oil prices and the uncertainty over trade relations that could drag on business decisions to hire and invest (particularly for exporters).

Source: TradingView

So, why isn’t gold playing ball?

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The Renewables Monthly Metals Index (MMI) held steady this month, coming in for a reading of 108 for the second straight month.

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Cobalt Prices

Cobalt prices are notorious for being both high and incredibly finicky given the relative scarcity of supply (not to mention the fact that the majority of the world’s cobalt is mined in the Democratic Republic of the Congo, which has been plagued by political instability, violence and concerns regarding supply-chain ethics).

With that in mind, it might be news to some that the cobalt price has drawn back from record highs of late.

According to one Bloomberg report, that is good news for those looking for an in to the market and, subsequently, a chance ride the electric vehicle (EV) demand boom.

Per the report, cobalt sulfate has dropped more than 20% since April.

As China continues its efforts to battle rampant pollution in the country, so, too, continues the EV demand apace. According to the report, the country already is responsible for more than half of global EV sales.

Vale Inks Deal With Canadian Firms to Sell Cobalt

Sticking with the cobalt theme, Reuters reported Brazilian miner Vale has reached a deal with two Canadian companies that will, ultimately, lead to the sale of the coveted metal from the Voisey’s Bay mine in Canada (in the province of Newfoundland and Labrador).

Vale inked separate agreements with Wheaton Precious Metals Corp and Cobalt 27 Capital Corp “to sell an aggregate total of 75% cobalt stream with reference to the cobalt by-product to be delivered from January 1st, 2021, which encompasses the ramp-down from the existing Voisey’s Bay mine (Voisey’s Bay) and from the Voisey’s Bay underground mine expansion project (VBME), for a total upfront payment of US$ 690 million plus additional payments of 20%, on average, of cobalt prices upon delivery.”

According to the deal, Vale will receive an initial cash payment of $390 million from Wheaton Precious Metals Corp and an additional $300 million from Cobalt 27 Capital Corp.

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Actual Metal Prices and Trends

Japanese steel plate fell 1.7% month over month to $722.52/mt. Korean steel plate rose 3.8% to $672.43/mt. Chinese steel plate dropped 2.5% to $739.87/mt.

U.S. steel plate, meanwhile, traded flat, sticking at $937/st.

U.S. grain-oriented electrical steel (GOES) coil surged 17.8% to $2,915.

Chinese cobalt cathodes fell 3.3% to $100,411/mt.

The Construction Monthly Metals Index (MMI) dropped two points, falling for a reading of 93 this month.

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U.S. Construction Spending

May construction spending rose 0.4% compared with the revised final estimate for April, according to Census Bureau data released this week.

Spending in May hit $1,309.5 billion, up from $1,304.5 billion in April.

The May spending estimate greatly exceeded the May 2017 total, rising 4.5% year over year.

Meanwhile, through the first five months of the year, spending increased 4.3% compared with the January-May period in 2017.

Private construction spending was $1,005.4 billion, or 0.3% above the revised April estimate of $1,002.3 billion. Within private construction, residential construction was $553.8 billion in May, up 0.8% from April. Nonresidential construction, on other hand, was $451.5 billion in May, down 0.3% from the previous month.

As for public construction, spending was $304.1 billion, up 0.7% from April. Within public spending, educational construction was at a seasonally adjusted annual rate of $74.3 billion, up 0.9% from April. Highway construction hit $94.6 billion, down 0.2% from April.

Billings Growth Continues

The Architecture Billings Index (ABI), put out monthly by the American Institute of Architects, once again showed growth in May.

The ABI hit 52.8 (anything above 50 indicates billings growth), up from 52.0 in April.

“Slightly more firms reported an increase in firm billings than in April, and May also marked the eighth consecutive month of billings growth,” the May ABI report states. “Inquiries into new projects and value of new design contracts also continued to grow at a steady pace, indicating ongoing interest from clients in starting new projects.”

This month’s report included survey data from architecture firms that were asked about productivity levels. According to the report, 55% of respondents said firm-wide productivity levels were up by either a little or a lot over the last few years. Meanwhile, only 20% said productivity levels were down in recent years.

In terms of realizing greater productivity, 40% of respondents said staff and/or staff training were the biggest factors in “determining changes in staff productivity.” In addition, 22% said the biggest factors were the economy or project workloads.

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Actual Metal Prices and Trends

Chinese rebar rose 0.9% to $625.11/metric ton, while Chinese H-beam steel jumped 1.0% to $644.74/mt.

U.S. shredded scrap steel picked up a dollar to reach $371/short ton.

European commercial 1050 sheet aluminum fell 2.4% to $3,000.12/mt.

Chinese iron ore PB fines fell 3.3% to $79.27/dry metric ton.

There will be significant winners and losers to the current U.S.-E.U. trade war, but none more so than in the automotive sector.

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Size matters when it comes to reshuffling production among plants to avoid import tariffs. According to the Financial Times, larger companies like Toyota, Volkswagen, and the Renault–Nissan–Mitsubishi Alliance (RNM), all of which make roughly 10 million vehicles a year, have the capacity to move production between plants.

Toyota is probably the best placed, with two-thirds of its cars sold in each region already made within the borders of that region. The VW group, with 122 factories around the world, has considerable flexibility and, like Toyota, has been a pioneer in flexible manufacturing systems that allow it to make a range of vehicles at each site.

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Source: Laurentiu Lordache/Adobe Stock

Not long ago, we mentioned that copper prices had been plunging of late — but the so-called “Dr. Copper” isn’t the only one on hard times.

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Zinc has also been trending down this year. LME primary cash zinc opened the calendar year at $3,288/mt, but was down to $2,895/mt as of Wednesday, June 27 according to MetalMiner IndX data, good for a 12% decline through the nearly halfway point of the year.

Still, the zinc price remains in a long-term uptrend that dates back to December 2015.

The LME zinc price has dropped 12% so far this year, but is still in a long-term uptrend. Source: LME

A Global Surplus in Q1

First, we must look at basic supply and demand. According to the International Lead and Zinc Study Group (ILZSG), the global refined zinc market boasted a 25 kt surplus in Q1 2018. In addition, reported inventories rose by 118 kt in Q1.

Zinc mine production, however, barely budged in Q1 compared with Q1 2017. In Q1 of this year, mine production was 3,086,000 tons, compared with 3,082,000 tons in Q1 2017.

Meanwhile, refined zinc metal production globally jumped 1.7% year over year in Q1 2018, as production in Australia, Belgium, China, Norway and Peru helped cancel out decreases in India and China, according to ILSZG.

As for actual usage, that only increased by 0.4%, driven by demand from China and India, according to the report.

U.S. Dollar

The U.S. dollar correlates inversely with zinc, as it does with other base metals.

As such, it’s important to note the firming of the U.S. dollar over the past few months. The index is up 5.74% compared with three months ago, according to MarketWatch data.

Chinese Smelter Cut Gives Price a Boost

The zinc price did get a boost on Thursday, June 27, as Chinese smelters plan to cut production by 10% on account of low prices, according to a Reuters report.

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The LME zinc price moved up 0.8% on Thursday, moving off of a 10-month low, according to the report.

The president’s assertion that trade wars are easy to win is — at this stage, at least — looking a little less certain than it was at the outset.

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Not surprisingly, exporters to the U.S. impacted by actual and proposed import tariffs are threatening to retaliate with tariffs of their own.

The Financial Times reports comments from global automakers warning that plans to impose tariffs on auto imports could raise prices of imported vehicles by as much as $6,000 per car and raise the cost of locally made cars, most of which include some foreign content.

The most alarmist comments are, not surprisingly, from the Alliance of Automobile Manufacturers, which is quoted as saying that buyers of imported vehicles would face an average $5,800 price rise from a 25% tariff.

“Nationwide, this tariff would hit American consumers with a tax of nearly $45bn, based on 2017 auto sales. Not included in this figure are costs from tariffs on auto components,” the industry group said.

In reality, such a significant price increase on imported cars would push the market in favor of domestic manufacturers. So, 2017 auto sales are probably not an exact benchmark; however, even the cost of the Honda Odyssey produced in the U.S. would rise by $1,500-$2,000 because of its imported content, the Financial Times reports.

Should, as seems likely, overseas markets impose retaliatory tariffs, this could have a significantly negative impact on U.S. auto exports, which totaled $99 billion last year.

Not surprisingly, figures vary widely as to the likely impact on U.S. vehicle production and the potential for loss of American jobs.

The Alliance of Automobile Manufacturers, citing data from the Peterson Institute, suggests a 25% tariff on imported vehicles and components would result in a 1.5% decline in U.S. vehicle production and a loss of 195,000 American jobs over a period of one to three years; if other countries retaliate, job losses could increase to 624,000.

Economists at Oxford Economics, on that other hand, said new U.S. auto tariffs would have a modest direct impact on the economy, suggesting a 0.1% reduction in GDP in 2019 and 0.2% in 2020, representing 100,000 job losses in the first year.

Either way, outside of political circles there seem to be few suggesting it will be good for jobs or auto production in the short to medium term. Should tariffs remain in place in the medium to long term, they would almost certainly boost prospects for domestic automakers and hasten the realignment of supply chains to domestic component suppliers.

So far, of course, it is unclear if the president really intends tariffs to be a long-term feature or rather a tactic he has deployed as part of a negotiating strategy to force changes in the terms of trade with America’s partners. Should the strategy be successful, it’s possible some tariffs will never be applied or could be rescinded within a matter of months. Businesses, of course, can only afford to sit and wait so long before they have to take action after the point at which tariffs are actually applied.

After the president’s unprecedented tariffs on steel and aluminum, few are doubting his resolve. Component suppliers throughout the supply chain are no doubt busy evaluating the implications for their business.

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Tariffs or no tariffs, that process alone will encourage the reshoring of component supplies over the coming years.

Supply chain vulnerability has taken on a whole new urgency.

President Donald Trump will not be the first commander-in-chief to find that waging wars on multiple fronts is a strategy with significant drawbacks.

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Taking on America’s NAFTA partners, Canada and Mexico, at the same time as the European Union is encouraging multiple retaliatory measures at a time when most people believe the real target was always intended to be China.

Many hold-up Caterpillar as the bellwether of U.S. industry, but if Caterpillar is the bellwether then Harley-Davidson must surely be the most iconic of American manufacturers. Its unique style of motorcycle is recognized and admired the world over and has come to epitomize the confident, free-spirited American dream.

So, when a firm like Harley-Davidson, which was repeatedly lauded by the president during his election campaign as an American icon and job creator, announces that it is going to have to shift production of its bikes overseas to avoid retaliatory tariffs imposed by the European Union, you have to ask if something is going a little wrong with the trade policy.

In a New York Times article, Harley-Davidson is quoted as saying the move “is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers in the E.U. and maintain a viable business in Europe.” Europe is the firm’s second-largest market after the U.S. However, as popular as its bikes are, the E.U.’s recently announced 31% import tariff — levied in retaliation for U.S. steel and aluminum import tariffs imposed by the president, the E.U. claimed — will, in the firm’s opinion, decimate sales.

Currently, Harley-Davidson incurs a 6% import tariff into the E.U., a cost the company appears comfortably able to absorb and still compete with domestic E.U. and Japanese motorcycle makers. But an increase to 31% would see on average a price increase of $2,200 per motorcycle, according to the article (although with the cheapest Sportster retailing for over $12,000 and top of the range models going for well over $20,000, that figure seems conservative).

Harley-Davidson agrees passing on the price increase to consumers is not viable. While no plans have been announced, the word is India may be the recipient of Milwaukee’s finest.

Not that India would be a significant market for Harley-Davidsons, as they have a heavy tax burden on larger bikes and you almost never see anything larger than the Royal Enfield 350 Bullit on the streets – the exception being the smart set in downtown Mumbai on their Ducatis and higher-end Japanese bikes (but that is still a small niche market).

Harley-Davidson sold 40,000 bikes in the E.U. last year and has vowed to absorb the tariff hike to preserve market share, at least for the remainder of this year, a move that could wipe out one-third of the company’s net profit. But Harley-Davidson does have options — it already manufactures in Brazil, Australia, India and Thailand, with India and Thailand becoming increasingly important assembly points.

These tariffs look set to hasten that trend, at least for sales outside of the U.S., as U.S. component costs rise due to import tariffs and retaliatory tariffs make U.S. manufactured goods less viable.

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Harley-Davidson is not alone in feeling the heat of such tariffs. Bourbon makers, orange juice producers and even playing card manufacturers are said to be in the same position.

But none are as quintessentially American as Harley-Davidson.

Andrey Kuzmin/Adobe Stack

As even casual watchers of world affairs and international commerce might have caught on to by now, protectionism — or, at minimum, complaints of protectionism — has been on the rise.

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The current of protectionism has blown in many directions, from the U.S. Section 232 tariffs to the proposed tariffs on Chinese imports, not to mention the flurry of counter-tariffs (both proposed and actuated).

The European Union struck back against the U.S. steel and aluminum tariffs this past week, imposing import tariffs on a variety of American goods, from steel and aluminum products to Harley-Davidson motorcycles. (The tariffs went into effect on Friday, June 22.)

Nonetheless, the European Commission touted a new report this week that claims it “has eliminated the highest number ever of trade barriers faced by EU companies doing business abroad.”

“As the world’s largest and most accessible market, the EU is determined to ensure that foreign markets remain equally open to our firms and products, E.U. Trade Commissioner Cecilia Malmström said. “Given the recent rise in protectionism in many parts of the world, our daily work to remove trade barriers has become even more important. Ensuring that our companies have access to foreign markets is at the heart of our trade policy. Today’s report also underlines that effective solutions can be found within the international rulebook. As protectionism grows, EU enforcement of the rules must follow suit.”

According to the release, “45 obstacles were lifted fully or in part in 2017 – more than twice as many as in 2016.”

“The barriers removed spanned across 13 key EU export and investment sectors, including aircraft, automotive, ceramics, ICT & electronics, machinery, pharma, medical devices, textiles, leather, agri-food, steel, paper, and services,” the statement reads. “Overall, this brings the number of barriers eliminated under the Juncker Commission to 88.”

E.U. companies exported an additional €4.8 billion in 2017 as a result of the removal of barriers from 2014-2016. Among those barriers removed were, according to the report:

  • Recognition of safety standards used by the EU machinery industry in Brazil’s new safety legislation;
  • Elimination of administrative barriers for services in Argentina;
  • Removal of restrictions on copper and aluminium scrap, and paper in Turkey;
  • Removal of animal and plant health and hygiene barriers related to bovine exports from some EU Member States to China, Saudi Arabia and Taiwan;
  • Elimination of certain restrictions on poultry exports from some EU Member States to Saudi Arabia and the United Arab Emirates.

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The full Trade and Investment Barriers Report can be read here.

gui yong nian/Adobe Stock

U.S. imports of steel dropped 23.2% in May compared to the previous month, according to an American Iron and Steel Institute (AISI) report citing U.S. Census Bureau data.

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The U.S. imported a total of 2,887,000 net tons of steel in May.

The finished steel market share hit 25%, just under the 26% for the year to date.

Germany led the way with 140,000 NT, up 16% from April. Trailing Germany were: Japan (120,000 NT, up 22%), South Korea (110,000 NT, down 77%), Turkey (92,000 NT, down 37%) and Taiwan (77,000 NT, down 33%).

Meanwhile, for the first five months of the year, South Korea led the way with 1,532,000 NT, down 1% versus the same period in 2017), followed by: Japan (612,000 NT, down 7%), Turkey (567,000 NT, down 50%), Germany (549,000 NT, up 13%) and Taiwan (467,000 NT, down 6%).

Imports of wire rods increased 61% from April to May.

In the year to date, other products posting increases compared with the same period in 2017 were: hot rolled sheets (up 38%), plates in coils (up 36%), mechanical tubing (up 23%), line pipe (up 20%) and oil country goods (up 19%).

Of course, the U.S. imposed tariffs of 25% on steel and 10% on aluminum for most countries back in March, with exemptions having been negotiated for a small group of countries. Notably, the European Union, Canada and Mexico were not exempted long term, as the U.S. announced at the end of May that it would not extend the short-term exemption for the trio.

Raw Steel Production

For the week ending June 23, U.S. raw steel production inched up 1.4% from the same week in 2017, and jumped 1.8% for the week ending June 16, according to AISI data.

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The capacity utilization rate was 75.6% for the week.

The diverse drivers of expanding renewable energy and demand for liquefied natural gas (LNG) are in turn stimulating demand for stainless steels and aluminum.

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Perversely, the growing competitiveness of renewable energy is making the use of natural gas less economic for baseload power generation. However, according to a Bloomberg report, the rise of variable renewable energy sources is expanding LNG’s role in providing flexible power generation to balance the electricity grid in many major economies.

The use of LNG in the industrial and transport sectors is also pushing up gas demand, particularly in Asia where environmental concerns are finally having an impact on policy.

Markets like South Korea, Japan, Europe and particularly China are increasing LNG consumption as major new LNG facilities come on-stream and costs fall. According to global data, global LNG liquefaction capacity is set to expand by 117% over the next four years from 419 million tons per annum in 2018 to 907 million tons per annum by 2022. Not surprisingly, with its abundant natural gas supplies arising from the shale market, North America leads in terms of planned and announced capacity growth, contributing some 82% of the total, the news release reports.

Source: GlobalData

All this LNG requires both liquefaction and transport, driving demand for stainless steels, nickel alloys and aluminum. Indeed, the LNG market has proved one of the bright spots for stainless steel and nickel alloys badly hit by a collapse in investment in the oil industry following several years of declining crude oil prices.

The market now faces the prospect of renewed interest from the oil sector following substantial rises in the crude price over the last year and ongoing long-term investment in LNG facilities, both onshore and for marine transport.

Although there are likely to be ebbs and flows in LNG demand — and, therefore, investment over the coming decade — the consensus remains that the market will continue to grow as domestic production of natural gas in southeast Asia and Europe declines and import demand, therefore, rises.

Source: Bloomberg

Liquefaction facilities at the point of export and decompression facilities at the market of destination are contributing to demand for 5000 series aluminum alloys, particularly in the U.S., Australia and the Middle East.

While the construction of LNG carriers, which is dominated by the shipyards in South Korea and China, is creating demand for high-quality stainless steels and special nickel alloys, like Invar.

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LNG expansion has quietly played its part in the gradual rise in nickel prices over the last two years, despite most of the attention being taken by the electric vehicle battery market and renewables.