Market Analysis

Brexit

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After four and a half years and unprecedented social and political discord, it has finally happened: the United Kingdom has left the European Union with the bare bones of a free trade agreement.

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Bare bones free trade agreement

It took until Christmas Eve — ahead of the Dec. 31 deadline exit date for both sides to make the final compromises necessary to reach an agreement.

However, to Prime Minister Boris Johnson’s credit, after all of the lies and disinformation around the benefits of leaving the E.U., he did finally get it done. Even the normally neutral and sober Financial Times acknowledges it is but the bare bones of a deal, with much left uncovered and much still to be agreed.

The deal covers goods, exports to the E.U. of which make up just 8% of U.K. GDP. However, the deal leaves out services. According to The Guardian, services account for around 80% of the U.K.’s economic activity and about 50% of its exports by value to the E.U.

There will be a lengthy process of ongoing negotiation around how much access the City of London is allowed to E.U. business. Similarly, there will be discussions regarding what constitutes the required “equivalence” for which the E.U. is looking.

This means the previous passporting agreement allowing automatic access to the E.U. is replaced by so-called equivalence. That is, each side unilaterally permits companies from the other to conduct certain financial activities in its territory.

That’s hardly a stable position. E.U. countries like France and Germany have made no secret of their desire to challenge the U.K.’s historical dominance in financial services post-Brexit.

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The oil price is caught between a short-term recovery and the medium-term prospect of peak oil, as countries ramp up programs to decarbonize by switching power generation sources and banning internal combustion engines (ICE).

The oil price has been seesawing between vaccine optimism and pandemic pessimism. Yet, it has managed a gradual recovery from its lows last year to around $50 a barrel now.

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Oil price recovers … but outlook remains muted

However, the oil price is nowhere near where most OPEC+ members would like it to be. It’s also not where shale producers need it to be to sustain capital raising for a return to growth.

However, the oil price could arguably have been a lot less. The price owes its current position to stoic management by OPEC+’s leading producers, Saudi Arabia and Russia.

Consumption still hasn’t recovered to a pre-pandemic level. Furthermore, it doesn’t have any prospect of reaching the levels projected for 2021 global consumption this time last year.

Demand destruction

Demand destruction has come from three main areas, the Financial Times notes, none of which are likely to turn around anytime soon.

The first factor is jet fuel. Air travel is severely depressed and is unlikely to fully recover for several years. Current consumption is some 2.5 million barrels per day below pre-pandemic levels.

Meanwhile, the second factor is gasoline and diesel consumption, which will likely recover more quickly. Even so, it will likely not see 2019 levels this year.

The final hit is from a wider loss of industrial activity and lower levels of goods shipped by sea.

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There has been quite a bit of analyst chatter about the likely impact of China’s return to the steel scrap market next year.

In 2019, the authorities essentially banned steel scrap imports. The move came, in part, because many of the grades were classified as waste. However, of late the rumor is China will be moving to reclassify ferrous scrap as a recyclable resource and could lift the import ban (probably in Q1 2021).

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Steel scrap imports plunge

According to Platts, China has 184 million tons of EAF steelmaking capacity at the end of 2020. Furthermore, the country will likely have 197 million tons by end of 2021.

The totals are up from 175 million ton at the end of 2019, when scrap imports had plunged to just 180,000 tons due to the ban.

Domestic steel scrap production has been on the rise, generating some 240 million tons in 2019. As such, the 2014-18 average annual imports figure can be seen as minuscule by comparison.

But while they may be small, they are not insignificant.

Normally, imports rise and fall relative to the premium arbitrage of domestic prices over world prices. Currently, domestic steel scrap prices in China are said to be about $60/mt or Yuan 400/mt over Southeast Asian seaborne scrap prices on like-for-like grades (when freight and taxes are included).

Should imports be relaxed, there is, therefore, the potential to suck in considerable imports.

Platts suggests this would not top the record 13.7 million tons imported in 2009. Some, however, disagree, saying it could reach 20 million tons.

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commodities

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When Jim O’Neill, former chairman of Goldman Sachs Asset Management and a former U.K. treasury minister, posts his thoughts on what 2021 may bring for equities, commodities and the dollar, it is worth taking a few minutes to listen.

Few economists have his level of both academic and practical experience in global financial markets. Over the decades, he has been proved more right than wrong.

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Bull or bear for commodities, equities

The premise of his post is simple: will 2021 prove to be a bull or a bear market?

Spoiler alert: he believes it will be a bull. However, he says it won’t be with the same trajectory as the recovery in 2020 has seen.

To the downside, he sees risks from a slow rollout of vaccines. After huge hype, the vaccines have raised expectations of an early end to the pandemic.

Countries that have struggled to cope with testing and tracing, such as the U.K., may struggle to roll out an effective vaccination program. Organizationally, the two are not so very different in their challenges.

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wind and solar electricity generation

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The Renewables Monthly Metals Index (MMI) gained 7.8% for this month’s index value. (Editor’s Note: This report also includes coverage of grain-oriented electrical steel, or GOES.)

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EIA: U.S. to add wind, solar capacity to electricity generation mix

While an overwhelming majority of U.S. power generation still comes from non-renewable sources, the renewables share of the mix will only continue to grow.

The U.S.’s share of electricity generation from renewables is forecast to rise from 18% in 2019 to 20% this year, the Energy Information Administration (EIA) reported in its recent Short-Term Energy Outlook. Meanwhile, the EIA forecast the figure to rise to 21% in 2021.

Furthermore, the EIA expects the U.S. electric power sector will add 23.0 gigawatts (GW) of new wind capacity in 2020. In addition, the sector will add 9.5 GW of new capacity in 2021.

Meanwhile, the sector will add 12.8 GW of solar power capacity in 2020 and 14.0 GW in 2021.

Glencore, GEM Co. extend cobalt supply partnership

Miner Glencore announced an extension of its cobalt supply agreement with Chinese recycler GEM Co. Ltd. 

The parties announced a five-year partnership in October 2019. Earlier this month, Glencore announced the two parties would extend the supply agreement an additional five years to 2029.

Under the agreement, Glencore will supply approximately 150,000 tonnes of cobalt contained in hydroxide between 2020 and 2029.

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The Global Precious Monthly Metals Index (MMI) gained 1.5% for this month’s index value, as the gold price has lost some of its gains from the summer.

December 2020 Global Precious MMI chart

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Gold price gains

MetalMiner’s Stuart Burns recently checked in on the gold price and where it might be expected to go in 2021.

As precious metals watchers know, the gold price has enjoyed a sharp rise this year amid the global pandemic.

“The bulls are predicting a resurgence in the price to U.S. $2,300 per troy ounce in 2021,” Burns wrote.

“Goldman Sachs stated last month they had a target of $2,300, as recovery from the coronavirus-related recession fuels higher inflation next year. Goldman’s economics team sees inflation rising to 3% next year before weakening through year-end. Further fuel could be added from a recovery in demand from India and China.”

However, in the short term, the gold price has retraced since its August peak.

“Investors rotated out of safe havens into riskier assets on hopes of a vaccine-induced economic boom next year,” Burns explained.

“The story here is more conflicting. Yes, vaccines appear to be coming faster than London buses in rush hour.

“However, so are infection rates and hospitalizations.”

So, as with most commodities and commercial sectors, much of what happens next depends on the the world’s ability to get the pandemic under control and begin to return to pre-pandemic routines of life.

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The Rare Earths Monthly Metals Index (MMI) surged 26.9% for this month’s reading.

December 2020 Rare Earths MMI chart

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

European Raw Materials Alliance initiative aims to strengthen supply chain

The European Commission recently launched the new European Raw Materials Alliance (ERMA) earlier this year.

Last week, ERMA kicked off the first “cluster” aimed at strengthening the domestic supply of rare earths magnets and motors.

“The first Cluster of ERMA deals with one of the most critical value chains for many key EU industrial ecosystems: rare earth elements (REE) used in high performance magnets and motors,” ERMA said in a Dec. 9 release. “ERMA supports a multi-sourcing strategy of REEs from feasible, responsible sources (primary and secondary) to ensure resilient supply chains and increase European industrial competitiveness. In addition, Europe’s capacities need to increase in magnet making as well as resource efficient and smart product design for the Circular Economy.”

Over 100 ERMA partners participated in the first meeting — held online — of the Rare Earth Magnets and Motors Cluster.

“The first draft of a rare earth action plan for Europe developed over the last months by a group of stakeholders from the REE sector was also presented during the meeting,” the ERMA release continued. “The work on this action plan continues within the ERMA Rare Earth Magnets and Motors Cluster through specific task forces that will identify challenges and regulatory bottlenecks along the value chain and develop recommendations and actions for Europe.”

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The Construction Monthly Metals Index (MMI) rose 4.9% for this month’s index value, as U.S. construction spending showed recent gains.

December 2020 Construction MMI chart

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U.S. construction spending

U.S. construction spending in October 2020 reached a seasonally adjusted annual rate of $1,438.50 billion, the Census Bureau reported.

The October rate marked a 1.3% increase compared with the previous month.

Furthermore, the October spending rate marked a 3.7% year-over-year increase.

Meanwhile, spending during the first 10 months of this year totaled $1,189.6 billion, or up 4.3% year over year.

Spending on private construction reached a seasonally adjusted annual rate of $1,093.7 billion, or up 1.4% from the previous month. Under the umbrella of private construction, residential construction reached a rate of $637.1 billion, up 2.9% from the previous month. The nonresidential construction rate dropped 0.7% to $456.6 billion in October.

Meanwhile, the estimated seasonally adjusted annual rate of public construction spending reached $344.8 billion, up 1.0% from the previous month. Under public construction, educational construction reached a rate of $86.4 billion, or up 1.1%. Highway construction rose 1.6% to $92.6 billion.

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The Stainless Monthly Metals Index (MMI) increased by 3.8% for this month’s index value.

December 2020 Stainless MMI chart

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U.S. producers wary to ramp up capacity

Demand from automotive and white goods manufacturers has been strong in the past few months.

For this reason, mill sales have increased. However, mills are not operating at full capacity. Rather, mills have kept long lead times.

This is leading to declining inventory levels across the U.S. stainless steel market. The trend follows several months of destocking in the distribution sector, as well as at manufacturers’ warehouses.

This mix could create challenges for manufacturers to replenish their depleted stock levels in upcoming months. Nevertheless, mills remain hesitant to ramp up capacity to pre-pandemic levels given current unstable market conditions.

In the meantime, these dynamics may continue to support stainless steel prices.

Chinese market

Reported sales of household appliances in China this October showed a nearly 10% year-over-year increase.

Meanwhile, demand for stainless steel increased approximately 13% year over year.

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auto sale

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The Automotive Monthly Metals Index (MMI) gained 9.6% for this month’s index value, as U.S. auto sales continue to show resilience.

December 2020 Automotive MMI chart

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U.S. auto sales

General Motors switched from monthly to quarterly sales reporting in 2018; Ford followed suit in early 2019.

However, despite the industry trending toward quarterly reporting, Ford has apparently had a change of heart.

The automaker last month announced it would return to quarterly reporting. Ford reported November U.S. sales of 149,931 vehicles, down 20.9% year over year.

Ford truck sales fell 20.9%, while SUV and car sales fell 16.4% and 39.1%, respectively.

Among other monthly reporters, Honda reported November sales fell 23.4% year over year. Honda car sales fell 26.9% and truck sales fell 21%.

Hyundai sales fell 9% year over year in November.

“We were able to maintain our industry-beating sales momentum despite quirks in the reporting calendar and added COVID-19 challenges,” said Randy Parker, vice president of national sales at Hyundai Motor America.

U.S. auto sales forecast to nearly match 2019 levels in November

According to the most recent automotive forecast released by J.D. Power and LMC Automotive, new-vehicle retail sales were forecast to drop 0.7% in November when accounting for changes in selling days.

Meanwhile, for total U.S. auto sales, the forecast included a 3.5% decrease when adjusted for selling days.

“November 2020 is a prime example of why accounting for selling day differences is important in measuring comparable sales performance,” said Thomas King, president of the data and analytics division at J.D. Power. “After two consecutive months of year-over-year retail sales gains, a quirk in the November sales calendar will result in new-vehicle retail sales appearing to fall 12%. This year, November has three fewer selling days and one less selling weekend compared with 2019. When these calendar quirks are accounted for, new-vehicle retail sales are expected to almost match 2019 levels.”

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