Market Analysis

Is there any metal or, indeed, commodity in which China is not making the running — where China’s rising demand is not creating a wholly new dynamic in the global supply market? After some thought, one might have ventured uranium, that metal long dependent on the established generating markets of the old order Russia, France, Japan, the US and, more recently, South Korea. But apparently even the uranium market is rapidly changing. According to an FT article, China is aiming to generate 5 percent of its electricity from nuclear power by 2020, in the process quadrupling its uranium consumption to 50 million-60 million pounds a year, according to UxC forecasts.

Source: UxC

That compares with annual global demand of about 190 million pounds today and has seen the Chinese embark on an ambitious and aggressive buying spree at prices some 30 percent over current spot and twice spot prices of a year ago, tying up long-term supply offtake agreements and joint ventures. With minimal domestic production, just 2 million pounds this year, China’s imports have been equivalent to 20-25 percent of global uranium consumption and yet reactor building is still in its early stages with 23 reactors under construction but 120 planned, according to another article.

Ralph Profiti, analyst at Credit Suisse in Toronto, believes China is getting ahead of other consumers and, as with copper and non-ferrous metals, is building up a strategic stockpile before the Americans, Japan or Korea need to do their restocking.

If that is so, the US is particularly vulnerable. The country has over 100 nuclear reactors generating nearly 20 percent of the country’s electrical energy, but the US imports over 80 percent of its uranium supply. If uranium supply goes the way of other commodities, the US could increasingly be a hostage to the fortunes of an increasingly limited supply base as spot prices are driven higher and sources are tied up under long-term supply agreements. Which may explain why US authorities were so willing to pass approval for a Russian state-owned mining company, ARMZ, part of Rosatom power group, to control up to half of US uranium output by the middle of the decade.   The FT this week reported ARMZ has been approved by the Committee on Foreign Investment in the US, the government agency that vets foreign takeovers of US companies for possible national security implications. In November, the US Nuclear Regulatory Commission, which controls the ownership and operation of nuclear power facilities, also gave their go-ahead for ARMZ to take a 51 percent stake in Uranium One. The firm owns resources in Wyoming and plans under ARMZ’s control to ramp up production to between 2 and 4 million pounds by 2015 against a total US production today of about 4 million pounds.

Interestingly, the changing supply landscape has not escaped the investment community. BlackRock, said to be one of the largest investors in commodities, is said to be bullish on uranium, and an exchange-traded fund launched by Global X Funds has increased its holdings to $70 million in just three weeks since launch.

–Stuart Burns

That was the title of a recent webinar presented by the CME Group and Platts, and when the speakers finally addressed the question, the answer seemed to be, well, it already is.

“A picture is worth a thousand words, said Joe Innace, Platts chief editor of Steel Markets Daily, as he showed a graph plotting the Platts IODEX to Comex copper. For most part, the copper pricing pattern has been leading that of iron ore. After running a correlation, from June 2008 to November 24th of this year, Innace found the correlation to be 87 percent. “I believe that’s quite striking, he said, concluding, “Maybe iron ore already is the next copper.

Source: Platts

This may not necessarily be news to our readers MetalMiner has been following copper’s movement for some time now but it simply reiterates the importance of iron ore prices affecting steel demand and pricing in Q1 of 2011. Things are looking up for steel and copper next year. The FT reported that ThyssenKrupp is forecasting a year of double digit revenue and profit growth in 2011. In terms of copper, Reuters reported the same day that Threadneedle Asset Management expects a bumper year for copper in 2011 “as strong emerging market demand outweighs sluggish consumption in the developed world. Copper hit a record $8,966 per metric ton earlier this month.

Emerging market demand clearly colored the majority of the CME/Platts presentation, and showed what buyers can expect price-wise next year. Vale, for example, takes Platts’s IODEX values from this September to November to set their ore prices for 2011. Innace pointed out that the Sept.-Nov. values were up 9 percent from June-August. Both Vale and Rio Tinto are expected to raise fines by significant percentages on a number of products.

Source: Platts

Steel prices are obviously dependent on more than just ore prices; a whole basket of raw materials, seaborne freight and logistics also ties in. Other drivers considered were Black sea prices, Brent crude oil prices (which feed stock for other petroleum derivatives), the convergence between US HRC prices, China prices and FOB Black Sea prices last month, and the tight tit-for-tat moves between iron ore and US ferrous scrap prices.

Ultimately, the conclusion was surprise the volatility in iron ore is here to stay. With new product offerings, the industry will be allowed to manage their price and hedge against credit and risk issues, said Paul Shellman of CME Group. Supply and demand is up to markets, he said, but volatility won’t change.

–Taras Berezowsky

China’s ferro-alloys production has been hit by the same energy restrictions that curtailed aluminum production in the third and fourth quarters this year. A Metal-Pages report states the government had ordered many ferro-alloys producers to shut down in the last few months to meet its energy saving targets. However, the National Development and Reform Commission, the country’s top planning body, said the targets for the period of “11th Five-Year Plan have been achieved in advance. “This could be a sign that power rationing on the ferro-alloys industry will be eased in the following months, said an industry source.

A Bloomberg report suggests Chinese stainless steel production may rise 13 percent next year and Alloy Metals & Steel Market Research is predicting a 4.8 percent increase globally. Worldwide stainless steel production in 2009 was only 2.4 percent and crude steel 97.6 percent of total steel production, according to industry analyst Heinz Pariser. Analysts expect stainless steel demand to recover faster than that for crude steel, where government spending and construction activity have stalled. Demand trends for stainless steel are different from crude steel. Stainless steel is used extensively in consumer-related applications like cutlery, sinks and household appliances, while crude steel’s biggest customers are in infrastructure and construction. Even so, crude steel production is likely to rise on resurgent manufacturing activity in northern Europe and the USA; even if China’s growth rates cool, they will remain positive.

Ferro-alloy prices are generally expected to be supported not just by demand but by rising power costs. Thermal coal prices have been rising and are expected to rise further next year as we wrote recently, and even on current coal prices, some major producers like South Africa are facing rising costs. South Africa’s state power producer Eskom was allowed 25 percent tariff hikes in 2010, 2011 and 2012 by the regulator in February, and the utility has also warned of potential power outages from next year, until the first new large-scale generation plants come on stream. South African power is no longer cheaper than Russia’s or Ukraine’s and is 30 percent more expensive than even in Colorado.

Steel and stainless steel producers alike are caught between the proverbial rock and a hard place, with rising raw material costs but insufficient capacity utilization to raise prices for finished steel.

–Stuart Burns

We’re seeing some mixed messages again in bulk freight shipping prices as November has drawn to a close.

The Baltic Dry Index is down for a third straight session, declining 25 points to 2,145, according to a recent Bloomberg article. The index, long analyzed as an indicator of global economic growth and production, has undergone a rather steady decline during most of November, after hitting a 2010 low on Aug. 9. When last updated on Nov. 26, the index was down 1.4 percent.

Source: Bloomberg

However, this time, the surplus of ships is growing at a much higher rate proportional to the prices of iron ore and steel, which are also rising, driving the prices to rent bulk-carrying freighters lower. Rent prices for capesize ships those too large to sail through the Panama Canal, instead having to swoop around Cape Horn or the Cape of Good Hope dropped 16 percent over four days. (According to estimates by Clarkson Plc quoted in the Bloomberg article, iron ore will go up 6.1 percent, while the capesize fleet is looking to rise by 24 percent.)

Loyal MetalMiner readers will know that this has happened before, as we reported last July, mostly due to the vessel surplus rather than a dip in Chinese/Asian demand. The same holds true today: rebar prices in China have increased, and Chinese output remains strong. China’s PMI rose to 57.4 this past October, while the LEI rose to 150.8, both 2010 highs.

This time, it looks as though the oversupply trend will continue to hold. Alexandros Prokopakis, general manager of Mamidoil-Jetoil SA, mentioned in an interview with Hellenic Shipping News Worldwide that he doesn’t see an end to low tanker freight rates until 2012. “Of course the oversupply will continue to be a crucial factor. I have a very negative feeling for 2011 but I want to believe that mid 2012 onwards things will start to improve, he said. In terms of adding vessels to his fleet, Prokopakis added that he doesn’t think this is a good time to buy, despite attractive prices.

So does the decline in the BDI automatically spell doom for healthy overseas demand? Not necessarily. But we will have to wait for the vessel surplus from recent fleet expansion and the corresponding demand to even out until then, we can expect many more BDI ups and downs.

–Taras Berezowsky

Silver may not match gold as an inflation-hedging investment vehicle in many professionals’ eyes, but it has certainly proved popular with the general public and smaller investors. The Silver Institute reported on its Web site this week that the US American Eagle Silver Bullion coin program has already posted another record year with a month to go.   As of Nov. 24, the date of the press release, over 32 million of the US Mint’s 1-ounce coins had been sold, easily exceeding last year’s record of 28 million coins sold. Should the current pace continue, the Institute believes sales will surpass 35 million coins by year’s end.

Source: The Silver Institute

As this graph illustrates, sales of American Eagle Silver Bullion coins increased by 223 percent over the past five years as investors have taken a liking to holding a physical asset as a store of value separate from deposits or equities. According to the Coin Update News blog site, the US Mint was so overloaded with orders between Nov. 19 and 21 that the website collapsed and several thousand orders were lost.

Minting of silver coins is expected to rise by some 23 percent globally this year to an all-time high. A Bloomberg article reports that Royal Canadian Mint sales of silver Maple Leaf bullion are up 50 percent over those for 2009.

Likewise, the Perth Mint, which currently refines all of the gold mined in Australia, says it expects to sell 50 percent more of its Koala bullion coins this year than last, according to the Gold & Silver Blog.

The recent move towards silver investment comes as the price of silver has been outperforming gold. For the year to date, silver has risen by about 57 percent, while gold has gained about 25 percent. Investor demand this year could top 210 million ounces according to an FT article, representing almost a quarter of the total supply of the metal. Even the Austrian Mint is reporting doubling demand after producing silver Vienna Philharmonic coins at a record pace this year.

Expectations among some quarters, notably Philip Klapwijk, executive chairman of GFMS, are that silver prices will be even higher next year. But as with any trend, the secret is getting in at the bottom and off at the top — assuming you are looking to make some financial gain out of it. After so much movement and after the loss of uplift due to the buy-sell spread — approximately 10 percent — the opportunities now must be somewhat limited for investors recently attracted to the market. A few, such as Mr. Klapwijk, expect the silver price to exceed $30 an ounce next year. But by enough to be worth the risk of a price retreat or even to overcome the buy-sell spread? That’s another matter.

–Stuart Burns

The “Rare Earth Metal Scare, if we can agree to call it that, has lit a fire under some Japanese global corporations when it comes to securing raw material supply. The Ëœalleged’ rare earth export ban from China has put at least two Asian countries in high gear to kick-start a full-blown global sourcing strategy. The fire started when the Canadian Embassy in Tokyo received a request from the Japanese government in November, to conduct a seminar introducing Japanese trading firms and OEMs to Canadian junior rare earth mining firms. The meetings took place earlier this month. We spoke to a source that told us the trading houses had called the consulate up to 10 times per day inquiring about what metals each of the junior miners have available. Several Canadian mining companies participated (Avalon, Commerce Resources, Pele Mountain, Rare Earth Metals, Rock Tech Lithium, Stans Energy   and Harp Capital) and 65 Japanese companies attended, including Mitsubishi, Marubeni, Toyota, Mitsui, Hitachi, Sumitomo and The Japan Steel Works (JSW), to name a few — with just two weeks notice. Three hundred Japanese firms remained on the waiting lists to meet with the mining firms.

This activity comes on top of a recent Japanese government announcement of a $1.3 billion fund to help Japanese firms secure supplies from abroad. The fund encourages typically risk-averse trading houses and end users to find promising properties to make joint venture agreements to secure long term supply, according to Ron MacDonald, a former MP of the Canadian Parliament, now Senior Counsel Global Markets on behalf of Commerce Resources. Specifically, the $1.3 billion fund will go toward four key programs. The first involves reducing use and creating better economics around the use of the metal involved. The second involves programs toward research and development. The third program examines recycling technologies and initiatives and finally the fourth allows for direct investment in firms such as the ones based in Canada. Coordinated by JOGMEC (Japan Oil Gas Metals National Corporation), the organization will have “significant influence in cutting up these resources, according to MacDonald. Part of JOGMEC’s strategy involves early stage investment. Much of the discussions focused on the heavy rare earth metals and the percentages of heavies within each mine’s reserves.

MacDonald, in an interview with MetalMiner, discussed some of the challenges for Canadian mining firms as well as the Japanese mindset when it comes to investing in early stage companies. He suggested that Canadian firms should “get outside their comfort zone. Canadian firms look for funding from closed sources and private placements, but according to MacDonald, “their business is now truly global the pressure is global and the miners need to become more savvy about the international marketplace as that will drive the investment into production. He added that he felt a lot of these companies will have some difficulty moving in that direction.

MacDonald also offered specific advice to the Canadian government. “You have to represent the broad industry of Canada and make sure there is a level playing field to keep Canadian miners competitive, he said. MacDonald went on to say, “we need to be critically aware of what is going on in the US, particularly NAFTA where additional collaboration between the Canadian and US government via the US Restart program can make it easier for American firms to easily invest in Canada. Finally, with regard to down-stream processing that MacDonald characterized as a “difficult and thorny issue, he called on governments to partner with industry and develop cross-boarder strategies in which the US also participates.

From a Japanese perspective, MacDonald believes companies have historically invested too late in the process, after many firms have established long-term agreements as well as made investments. JOGMEC has encouraged Japanese firms to move more quickly and shore up supply and mitigate risk.

The Koreans have also taken a proactive role in shoring up long-term supply. Traditionally they have accepted the higher risk of early investments, particularly in light of supply shortages.

If the Chinese have reminded us all about one lesson regarding the supply of rare earth metals, it is this it almost never makes sense to rely on a “sole source (or in this case, a sole country) without having at least one other viable option available. How long will it take for American firms to take as proactive a stance as Japan and Korea? If you know of US firms aggressively seeking out long term supply, drop us a line…

–Lisa Reisman

In a typically frank interview, with Kamal Ahmed of the Telegraph this weekend, Jim O’Neill, the new chairman of Goldman Sachs Asset Management (GSAM), mapped out his view of currencies and the US economy.

Turning his attention first to the euro and European debt worries, O’Neill’s opinion was ‘we probably haven’t seen anything yet.’ He feels the euro should carry a risk premium of at least 10% and said the only reason the currency was not weaker was because of problems being masked by events in America and worries about weakness in the US economy. In Goldman’s view, these are overdone and O’Neill feels there are several encouraging signs that the US economy is showing more strength than it is being given credit for. Unemployment should start coming down slowly early next year and growth will pick up in 2011. As a result, the USD/Yen exchange rate in particular will come under pressure, but also the USD against other major currencies as the dollar strengthens in the face of further uncertainty in Europe and stagnation in Japan. In O’Neill’s opinion, the only problem the US had before the crisis was it had no domestic savings rate; two years on, savings have gone from 0.6% to 6.2% (which has resulted in the weakness in growth these last two years).

Encouraging views for US listeners, supported by recent developments both in macro economic trends and currencies following the Irish bailout last week, but what impact would that have on metals? First, gold would fall. The current strength of gold is predicated on fear of US inflation and prolonged financial instability — a stronger resurgent US with a rising US dollar would negate the safe-haven attraction of gold and likely result in the price coming off.

What applies to gold could apply to some of the base metals too. Aluminum has already come off on the back of a stronger dollar dropping from close to $2400/ton to $2250/ton in just the last two weeks.


This GFMS Index chart of all metals illustrates the falls well, following as it does the movements of the dollar over this period in the chart below it. Metals prices courtesy of Kitco, exchange rates of


Further dollar strength will likely push the price lower still, as it will for lead and some of the other lesser metals with well-supported fundamentals.

If O’Neill’s analysis is correct (and he hasn’t been at the top of his game at Goldman for over 15 years without being right more often than he is wrong), then this provides a cautionary counterargument to the more bullish views on base metal prices for next year. Those base metals with strong fundamentals like copper have fared better over the last two weeks of dollar strength and would likely continue to do so if the dollar rose further, but those like aluminum may find themselves under pressure next year, other developments (such as capacity closures) notwithstanding.

–Stuart Burns

Despite worries about Irish and Club Med country debt and auto sales continuing to decline across Europe, in some cases back to levels seen in the 1990s according to an AFP article, steel producers still plan to raise prices as the year ends.   A Steel Business Briefing note advised most medium section mills are sold out for December as distributors scrambled to take up December production prior to anticipated January increases. A Steel Guru article mentions that in spite of an estimated 40-90 million tons of excess capacity in the region, rebar prices, which were at 410 euro per ton EXW ($545/t) in southern Europe earlier this month, jumped to 450 to 470 euro per ton EXW ($600-625/t) for December. ArcelorMittal reported section steel increases of 25 euro per ton in October and 50 euro per ton in January. Spot prices in the flat steel market increased about 10 euro per ton since early November, while HRC is being offered at 450 to 500 euro per ton EXW ($600-665/t). The price increases span both the south to the north across Europe. Galvanized steel prices were reported in excess of 550 euro per ton EXW ($730/t).

As in North America, European producers have done a much better job during this recession in managing excess capacity and therefore maintaining a modicum of profitability in what would otherwise be dire times. A Rusmet-sourced article reports ArcelorMittal stopped three blast furnaces at two mills in France and one in Poland this summer. Last week it stopped steel smelting in one of two furnaces at its Romanian steel mill and during December it plans to idle some capacity in France and Germany. In addition, the company plans to temporarily idle seven rolling lines to bring supply of steel products in line with reduced demand. Early indications suggest US Steel may follow ArcelorMittal’s example —   this summer it stopped one blast furnace at its steel mill in Serbia, and it may stop the second soon, removing all of its steel smelting from its Slovak mill. The article estimates idle capacities at European integrated iron and steel mills total around 20 to 25 million tons per year and by the start of the next year it may reach even 30 million tons.

The mills’ ability and willingness to adjust capacity in line with demand is a testament to the consolidation that has gone on over the last ten years. Production is held in the hands of fewer but larger producers better able to take such strategic steps. While consumers would obviously like to see lower prices, rising raw material costs point to price trends in the opposite direction regardless of capacity utilization. To survive, it is important steel makers continue to make a profit. As recovery in European manufacturing does materialize, at least a steel industry will be there to service it in the years ahead.

–Stuart Burns

Though recently MetalMiner has covered many aspects of the aluminum market, we often encourage alternative points of view in particular, alternative global points of view. A frequent commentator on this site, Paul Adkins, has one such alternative point of view regarding some of the happenings within the Chinese aluminum market. Paul should know because he lives in Beijing and works closely with several aluminum producers within China. He also writes the blog Black China Blog and runs the company AZ China. If you seek alternative viewpoints within the aluminum industry in China, you need go no further. Paul Adkins is your man. Paul has taken an alternative point of view on the subject of China aluminum industry output reductions in order to drive down energy intensity. In a recent post on that very subject, Paul explains the Chinese aluminum industry likes to perpetuate that story, “According to our sources, the industry is delighted that the world’s press publish stories about capacity limitations and import growth.     Their view is that these things only help promote the metal price, which is why the industry is putting these stories out in the first place.

He’s not kidding. According to his latest monthly report, he sees fourth quarter China aluminum prices reaching $2500/ton (for what it’s worth, the LME closed on the 26th at $2242/ton). But overall, Paul sees the aluminum market within China very much in balance (though he concedes the Strategic Reserves Board has recently sold some of its holdings and inventory levels have dropped). Furthermore, he makes the distinction between China being a net importer of “primary aluminum vs “scrap imports. China is already a net importer, according to Paul, of scrap (and they will pay more for it given the country’s relative high energy costs).

Paul also reports that coke prices have started to increase as a result of rising oil prices and this will impact downstream markets. The combination of coke price increases and some smelter cutbacks could lead producers to turn toward export markets “that have a better capacity to pay.

If your company buys aluminum from China, you may wish to attend a special session of the Metals Society annual conference in San Diego from Feb 27 March 4 entitled, “China Aluminum Briefing led by Paul Adkins. That briefing will be held on Saturday February 26 at the Marriott Hotel. More information can be found at the AZ China website. In addition, the China Aluminum Briefing will feature a discussion of China’s aluminum imports with our friends from Harbor Aluminum, Mr. Jorge Vasquez.

Another exciting speaker who may join the conference includes Mr. John Garnaut (MetalMiner readers may know of John Garnaut who broke the now-famous Stern Hu Rio Tinto story last year when Mr. Hu famously said to Mr. Garnaut on the phone, ” I better hang up, I think my phone is being tapped.) Not one to shun controversy or public debate, Paul included a link to this article by John Garnaut that will sit well with anyone who feels China’s export trade policies are in need of an overhaul.

Additional speakers will cover the bauxite, alumina and coke markets and Paul will also address the aluminum fluoride market.

–Lisa Reisman

A Reuters US article reported earlier this week of how the copper price fell after the release of figures showing Chinese imports of refined copper had fallen. The fear is China’s economy is cooling after imports fell nearly a third in October, fueling concerns that credit tightening is rapidly cooling demand. However, local analysts blamed falling supply as the cause rather than lack of demand even though, curiously, stocks on the SHFE rose by 21.3% during the same period, according to a Reuters London article. Certainly one month does not necessarily mark a new trend, but several months of figures might, and China’s imports have been gradually falling this year over last — some 10.5% lower compared to 2009. Even this, though, should be seen in the light of 2009’s massive re-stocking program boosting apparent demand, a large part of which went into both trade and speculative stocks. Real demand has probably grown over last year and the recent drops should be seen in the light of current high prices dissuading consumers from further buying and encouraging the draw-down and use of stock bought last year at lower prices. Incoming material has therefore found its way onto the SHFE rather than having been taken up by consumers, suggesting that while prices remain at this level, consumers may prefer to live off lower-priced stock material rather than come back into the market for new supplies. That is a temporary situation, however, and a combination of stock depletion and slightly lower prices following recent LME price falls may encourage buying towards the year end. Certainly the market gets bought after each scare creates a dip in prices.

Two issues are driving the copper market at present. The first is fear that China’s growth may slow dramatically next year. Nearly everyone expects there will be a slowdown in growth but to what extent there is much debate. The second issue is the level of the US dollar, which is getting support from the European debt crisis and from the Korean artillery exchanges causing tension in Southeast Asia. Every time there is tension over these two issues, the dollar gets stronger on the back of a risk sell-off and metal prices fall. Interestingly, on a side note, you would expect gold to get stronger on the back of the flight to safety, but it hasn’t moved anywhere near as much as may be expected.

Copper, no doubt, is supported by its fundamentals. World refined copper consumption exceeded production by 363,000 tons between January and August this year, compared with a deficit of 47,000 tons in the same period a year ago, according to a Reuters article reporting on the International Copper Study Group’s latest monthly bulletin. World refined copper output in January to August reached 12.653 million tons, while consumption amounted to 13.016 million tons. If China demand does no more than stay flat and OECD demand gradually increases, that deficit is not going to go away. Data out this week suggests Europe’s largest economy and by far the strongest manufacturer is more upbeat about growth prospects in the next six months than at any time since the IFO think tank estimates began. Growth in the US, while not strong, does now look as if it will avoid a double dip and manufacturing in particular is doing well.

The industries’ tendency to buy copper on the dips is therefore understandable; any respite from recent highs is to be welcomed particularly, as there is little prospect of significantly lower prices next year.

–Stuart Burns

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