Market Analysis

The zinc price has defied expectations that oversupply would put so much downward pressure on prices that last month’s $3,100/ton high would be the peak for years to come.

Although the zinc price has drifted off those highs, it is currently just under $2,900 per metric ton for cash and three-month on the LME, zinc prices have remained stubbornly high, despite a complete lack of investor interest.

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Zinc price trends

zinc

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As with aluminum and copper, the Shanghai Futures Exchange has outperformed London this year. However, even the SHFE zinc price has come off this month. Most metals have moved into a temporary sideways market.

The International Lead and Zinc Study Group estimates the zinc market recorded a supply-demand surplus of just 31,000 metric tons in January-April, compared with a surplus of 256,000 tons in the same period last year, according to a Reuters post. That also compares with an earlier April forecast for a 353,000-ton surplus this year.

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U.S. steel capacity utilization reached 82.7% for the week ending June 26, the American Iron and Steel Institute reported Monday.

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Steel capacity utilization takes small step back

capacity utilization

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However, U.S. steel capacity utilization for the aforementioned week dipped from 82.9% the previous week.

Steel production during the week ending June 26 totaled 1,835,000 net tons, down 0.2% from the previous week. Meanwhile, production jumped by 44.3% on a year-over year basis.

During the same week in 2020, steel capacity languished at just 56.8%, as the industry had only just started to recover from the demand hit from March-May 2020.

As we noted last week, global crude steel production gained by 16.5% year over year in May. However, production dipped slightly in May from the previous month.

As Stuart Burns explained, the U.S. steel market remains tight, despite the steady rise in capacity utilization over the past year. Furthermore, U.S. buyers looking to import will likely have to look somewhere other than Europe.

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According to a recent report by the International Lead and Zinc Study Group (ILZSG), global lead and zinc supply exceeded demand through the first four months of the year.

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Zinc market in surplus

zinc

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Global zinc supply exceeded demand by 31,000 tons metric tons, ILZSG preliminary data indicated.

During the period, zinc mine production rose by 11.3%.

Australia, Bolivia, China, India, Ireland, Mexico, Peru, South Africa and the United States posted production increases.

Output from Canada, Finland, Kazakhstan, Namibia and Poland declined.

Meanwhile, refined zinc output rose by 4.5%. Zinc usage also increased, surging by 10.1% as a result of a “substantial rise” in China. However, China’s imports of zinc contained in zinc concentrates dropped by 9.4%.

Usage also increased in Brazil, India, Japan, the Republic of Korea, Taiwan, Thailand and Turkey. Meanwhile, apparent consumption fell by 2.1% in the U.S.

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U.S. steel imports fell to 2.3 million metric tons in May, the Census Bureau reported.

The May import total marked a slight dip from the 2.4 million metric tons imported in April.

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Steel imports decline in May

imports

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U.S. steel imports fell to 2.3 million metric tons in May, while imports through the first four months of the year were flat year over year at 8.4 million metric tons.

Imports of tin plate surged from 29,807 tons in April to 101,381 tons in May. Meanwhile, imports of cold-rolled sheets jumped from 89,028 metric tons to 131,497 metric tons in May.

In addition, hot dipped galvanized sheet and strip imports rose from 177,729 tons to 221,094 tons.

Imports of wire rod jumped from 57,343 tons to 93,849 tons.

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The steel market is running two diverging narratives.

In the U.S., the market remains extremely tight. Mill lead times are out to the end of this year. Furthermore, prices are set to stay high into 2022.

The situation is not dissimilar in Europe. In Europe, the steel market is seeing a similar post-pandemic bounceback, supply chain restocking and constraints, like the U.S., by tariffs on imported material.

But in the rest of the world, global steel production seems to be slowing. Raw material prices — iron ore, in particular — are easing.

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Steel market narrative outside of US, Europe

China steel production

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According to Capital Economics, global daily steel production in May came in somewhat lower than April, as output in China dipped.

The World Steel Association reported global steel production rose by an impressive 16.5% year over year in May. However, this is against a 2020 reference point during which many countries were only starting to emerge from national lockdowns in May 2020.

But looking at the month-over-month growth rate, daily global steel output fell by 0.4% in May. That followed a 3.5% rise in April.

At the same time, Beijing’s combination of dire warnings about manipulative speculative pricing, restrictions on credit for construction and pressure on polluting industries to reduce emissions have combined to cause a sharp correction on the previously buoyant iron ore price, down 9% on the Dalian exchange to $173/ton this week.

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Global copper mine production rose by 3.7% in the first quarter of 2021, the International Copper Study Group (ICSG) reported this week. The group estimated an apparent global copper surplus of 130,000 metric tons.

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Copper mine production gains to start the year

copper mine

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Global copper mine production recovered during the first three months of the year, the ICSG reported this week.

Concentrate production rose by 5.5%, while solvent extraction-electrowinning fell by 3.5%.

“Output in Peru, the world’s second biggest copper mine producing country, increased by 3% mainly because March production was up by 18% from a constrained March 2020 basis,” the ICSG reported. “However, Jan-Mar 2021 production is still 10% below that of Jan-Mar 2019.”

Earlier this month, Stuart Burns delved into Peru’s ongoing COVID-19 crisis, plus its recent presidential run-off.

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A year ago, China fired the first salvo across Australia’s bow by amending iron ore screening provisions.

This was perceived by the rest of the world as Beijing targeting Australian iron ore supply because of the latter’s support for a probe of the origins of the COVID-19 pandemic.

So, now is a good time to analyze how things stand on the iron ore supply situation.

In fact, not just iron ore supply, but the frosty relationship between the two countries has also affected commodities trade in things like coal and barley, to name a couple.

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China-Australia tensions and iron ore

bulk cargo iron ore

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In May this year, China suspended economic dialogue with Australia. The Australian government, led by Prime Minister Scott Morrison, is not budging yet. However, China continues to be Australia’s biggest trading partner.

What has irked the Chinese even more is the Morrison government’s increasing closeness to some of the Western powers, particularly the United States. a move that the Chinese have called,“a Cold War” mindset, the AP reported.

So where does all this leave the global iron ore supply?

Also, can the Chinese really ignore supply from Australia?

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However you slice and dice the statistics — and there are numerous ways stats can be sliced and diced — the global aluminum market is tight.

Whether we look at primary ingot, extrusion billet or rolling slab intermediates, or semi-finished sheets/plates, tubes and extrusions mill lead times are long and conversion premiums are high. Meanwhile, the global economy has bounced back from the pandemic. Local distortions, such as tariff barriers, to traditional supply chains have added to bottlenecks and robust restocking.

The MetalMiner Best Practice Library offers a wealth of knowledge and tips to help buyers stay on top of metals markets and buying strategies. 

Aluminum deficit to surplus

aluminum price

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According to the International Aluminum Institute (IAI), total global aluminum production rose to 5.74 million metric tons in May. The total marked its highest level and a rise of just under 6% compared to this time last year.

Admittedly, last year was distorted by the pandemic. However, from January through May, global smelters operated normally around the world. The pandemic hit consumption badly, but output remained resilient.

Not surprisingly, therefore, this year to date swung to a 588,000-ton deficit compared to over a 1-million-ton (1,074 kt) surplus, as reported by the World Bureau of Metal Statistics for the whole of last year.

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It won’t have been missed by anyone in the metals markets, but commodity prices have drifted off this past week.

The reason is a resurgent dollar.

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Commodity prices down on stronger dollar

commodities graphic

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It’s a simple but well-worn mantra: a stronger dollar equals weaker commodity prices.

Policy makers at the Federal Reserve advised Wednesday that interest rates would rise from record lows sometime in 2023, updating an earlier forecast of rises not until 2024.

 

The more bullish position on rates boosted the dollar. As a result, the dollar index gained 1.5% over last week. That marked its best result since last September.

In turn, commodities took a hit across the board.

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It would seem Beijing only has to speak and the market reacts — this time, it’s about base metals.

Worried by what it sees as excessive inflation in commodity prices, which it fears will lead through into factory gate increases, China warned speculators last month over “excessive speculation.” The warning from China’s National Food and Strategic Reserves Administration hit the iron ore market hard, the Financial Times reports, sending the price 10% lower.

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China turns to base metals

China aluminum

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This month, Beijing has turned its attention to base metals.

The authorities have hinted they may release metal from their strategic reserves. The move would be an overt attempt to dampen further price rises in what it sees as a speculator-fueled rally. Where applicable, it would provide additional supply for those metals where supplies are genuinely tight.

The country holds strategic reserves in copper built up over decades. During slumps, like after the financial crisis, Beijing has stepped in to support domestic producers.

State secrets

As a strategic reserve, copper stocks are a state secret.

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