Market Analysis

The U.S. steel capacity utilization rate dipped to 84.7% last week, the American Iron and Steel Institute (AISI) reported Monday.

The rate declined from 85.3% the previous week.

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U.S. steel output dips

steel production

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Production last week totaled 1.87 million net tons, AISI reported. The weekly total marked a drop of 0.6% from the previous week. However, output increased by 20.7% from the same week in 2020.

For the year to date (i.e., through Oct. 23), production reached 77.0 million net tons. Capacity utilization during that period reached 81.3%.

The total marked a 20.3% year-over-year jump from 64.0 million net tons. The capacity utilization rate reached 67.1% during the same period in 2020.

Steel prices flatten

As we’ve noted in recent weeks, steel prices’ over yearlong ascent appears to have at least, for now, slowed down.

The U.S. hot-rolled coil price closed last week at $1,922 per short ton, down 0.16% month over month, according to MetalMiner Insights data. Meanwhile, the hot-dipped galvanized price closed at $2,208 per short ton, down 2.39% month over month.

In addition, the cold-rolled coil price closed last week at $2,131 per short ton, or down 0.98%.

Plate prices have bucked the trend, however, reflecting the runup in oil prices. U.S. steel plate closed last week at $1,829 per short ton, up 7.46% month over month.

AISI advocates for infrastructure bill

Earlier this month, House Speaker Nancy Pelosi indicated intentions to vote by the end of October on the infrastructure package under consideration.

Fast forward to the last week of the month and there has still not been a vote.

This week, AISI indicated its support for passage of the Infrastructure Investment and Jobs Act.

“The ability of our nation to proceed on a path to economic recovery depends on reliable, safe and efficient modes of transportation,” AISI said. “Our industry like so many others rely on the nation’s roads, rail and water transportation to move raw materials and finished products. Since 2018, American steelmakers have invested $16 billion dollars in modern, state-of-the- art, environmentally responsible steel production to meet our nation’s infrastructure needs.”

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Bulls are pointing to the surging metals prices as evidence a supercycle is alive and well.

However, no one but a snake oil salesman would suggest that what we are seeing is anything healthy.

The 10-year commodities boom seen earlier this century, for example, was driven by rapid industrialization in China, a long-term expansion that lifted hundreds of millions out of poverty.

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Energy costs drive supply constraints

natural gas tap

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But the current surge in prices is a result of energy markets driving supply-side constraints.

Apart from the chaos that is the current global energy market, it’s China’s energy crisis that is principally driving metals prices higher.

However, China is far from alone in facing an energy crisis. Multiple other clouds are gathering.

Some are short term, such as coal and natural gas supplies.

Others are longer term, such as explored in a Financial Times post this week.

Property market challenges in China

The precarious state of China’s property market and the longer-term push by Beijing to pivot the economy away from construction toward consumption.

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This morning in metals news: BMW announced Wednesday it will source steel from Swedish firm H2 Green Steel; meanwhile, miner Freeport-McMoRan today reported its third-quarter and nine-month 2021 results; and, finally, metal prices remain elevated but have taken a step back this week.

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BMW to source green steel from Swedish firm

BMW logo

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Automaker BMW reported it will source steel using wind and hydroelectric power from Swedish firm H2 Green Steel.

“From 2025 on, the company plans to source steel produced with up to 95% less CO2 emissions and without requiring fossil resources such as coal,” BMW said. “The BMW Group has now reached an agreement to this effect with the Swedish startup H2 Green Steel, which uses hydrogen and only green power from renewable energies for steel production. Owing to its particularly energy-intensive manufacturing process, steel production is considered one of the main sources of global CO2 emissions.”

FreeportMcMoRan reports Q3 results

Freeport-McMoRan reported Q3 2021 net income of $1.4 billion. The figure marked a jump from $329 million in Q3 2020.

For the nine-month period ending Sept. 30, 2021, net income totaled $3.2 billion. Meanwhile, in the same period in 2020, net income amounted to a loss of $109 million.

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A timely post by the Financial Times covers the threat to the global auto industry as a result of the power crisis in China limiting supplies of key components used across a range of industries.

But specific to the post is the making of aluminum alloys. Almost 90% of the world’s magnesium production comes from China, the Financial Times reports. The Chinese government ordered roughly 35 of its 50 magnesium smelters to close until the end of the year due to power shortages.

magnesium periodic table image

Aleksander/Adobe Stock

The report quotes Barclays analyst Amos Fletcher, who said: “Thirty-five percent of downstream demand for magnesium is auto sheet — so if magnesium supply stops, the entire auto industry will potentially be forced to stop.”

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Rising aluminum alloy costs

 

The threat is real enough. Unfortunately, as we wrote recently on this issue, flagging up the risk to supply contracts and the potential for cost pass-throughs by aluminum mills, it is not confined to magnesium.

Since our last post, MetalMiner has seen first-hand examples of mills seeking to renegotiate extrusion contracts due to rapidly escalating raw material costs – specifically silicon, manganese and magnesium. All of those rely on high power consumption smelting or refining processes. Furthermore, the world has become dangerously reliant on China for these materials.

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$3,623,000,000,000 — that is the increase of M2 money supply in 2020.

By now, there should be no surprise what the effect of printing 23% of total USD has on commodity markets.

Store-of-value assets Bitcoin and gold

Knut/Adobe Stock

Aluminum breached $3,000 per metric ton this week. Carbon steel price action is only now seeing moderate relief after what seemed to be a never-ending spike since August 2020.

Due to everchanging price increases, some manufacturers now face quotes that expire within 24 hours of issuance. It’s fair to say that the general MetalMiner audience has felt the pain of monetary inflation in some form or another.

M2 money supply chart

M2 money supply. Souce: Board of Governors of the Federal Reserve System (discontinued by the Fed since February 2021)

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Gold as a store of value

While MetalMiner’s expertise is primarily in base metals, we also like to keep a close eye on larger macroeconomic factors.

Avid readers of our market updates are familiar with occasional articles on oil, tariffs, and precious metals, such as gold.

During times of rapid inflation, gold has historically served as the primary vehicle among store-of-value assets for institutional investors — and for good reason.

The physical properties of element 79 make it practically indestructible. Unlike the dollar, gold also has a high stock-to-flow ratio due to steady mining activity.

Considering all of this, it’s questionable how gold has stayed relatively flat for the last year.

During the past 15 months, the dollar has trailed down nearly 5%. Meanwhile, gold has barely moved a percent compared to the price in June 2020 and previous all-time highs in 2012.

So, what’s the deal here? Is another speculative asset taking market share from gold? Or is this simply a market irregularity?

As the headline suggests, there’s a mysterious trillion-dollar elephant in the room: Bitcoin.

Rise of Bitcoin

Whether through general media conjecture or more focused education, the “B word” has no doubt permeated the minds of investors since the beginning of the COVID-19 pandemic. A 900% increase during an 18-month period is going to turn heads, one way or another.

The Bitcoin community often uses the expression “digital gold” due to the striking similarities of its properties to gold. Parallels in terms like “mining” are easy enough to spot.

But what is it that makes them similar in principle?

Historical gold price chart

Gold fixing price in London bullion market, based in U.S. dollars. Source: ICE Benchmark Administration Limited via Federal Reserve Economic Data

A brief history of metals as money

When looking at the history of civilizations, money has come in many forms: beads, salt, cattle, etc.

The core reason why all of these failed as monetary vehicles is largely due to ease of production. For example, if a small colony used rocks as a form of money, mining stone quarries could significantly increase the supply with minimal effort (i.e., inflation). As stone production was accessible even for ancient civilizations, the value of the stone is drastically devalued upon each new quarry founded, akin to the dollar devaluing upon each new dollar printed by the Federal Reserve.

As time progressed, societies introduced sounder forms of money. In fact, the term “sound money” stems from the sound gold made when dropped from a distance.

When metals became the primary usage of money, gold soon became the global monetary standard due to its core properties. Gold requires drastically more energy and resources to mine, making new production more difficult than other materials. The longevity of gold’s uniformity also provides assurance that it will not corrode or deteriorate over time. The sound money principles of scarcity and durability are the foundations of what made gold attractive as a store-of-value asset. It is also why countries have used it as a monetary standard for centuries.

However, in 1971, the United States officially got rid of the gold standard. Thus began the era of unbacked fiat currency.

Money in the digital age

The 21st century is what some might call the digital age.

In the past 10 years, we’ve witnessed the dematerialization of everyday things into a digital realm: photos on Instagram, music on Spotify, social interactions on Facebook, video on Netflix, and the power to access and distribute all of this to 7 billion people with smartphones and computers.

When Bitcoin was introduced in 2009, it began with modest roots at a market cap of only a few hundred dollars.

Today, Bitcoin stores over $1 trillion dollars’ worth of value. It is now accepted as legal tender in the country of El Salvador.

Blockchain, the technology upon which Bitcoin is founded, presents the idea of money itself dematerializing into digital, decentralized and trustless networks.

Over the course of the following weeks, we will candidly explore the similarities and differences between gold and Bitcoin across the six properties of sound money: durability, portability, uniformity, divisibility, scarcity and acceptability.

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Several factors are likely to see base metals continue to encounter supply constraints into 2022.

Chief among them is demand, said Colin Hamilton, managing director of commodities research at BMO Capital Markets.

“We have never seen this level of demand impulse before,” he said in an Oct. 12 web presentation.

photonewman/Adobe Stock

Producers have also had difficulty keeping up with the demand, which Hamilton attributed partly to people working from home and ordering consumer durables online.

“This is bona fide, demand-driven deficit,” he added.

Hamilton’s statements came during LME Week, which took place Oct. 11-15. The event is an annual gathering for metal specialists, ranging from traders to analysts and CEOs, and includes an invite-only dinner hosted by the London Metal Exchange.

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Energy crisis impacts metals supply

The global energy crisis has also played a role in the supply difficulties.

“We are struggling to get additional calories into the world,” Hamilton said.

Causes behind the energy crisis are not so much due to the energy transition, which is still in beginning stages, but because there are substantially higher levels of heating of space, Hamilton noted.

Buildings could help to remedy space heating, however, as they cover about 30% of global energy. There are some metals-intensive wins there. Smart facades of metals on buildings will allow for better temperature control. Meanwhile, improved ventilation in light of COVID will benefit zinc and copper. Furthermore, LED lighting is wiring-intensive.

The amount of data and Cloud IT spending and 5G have also proven energy-intensive.

“All these factors are playing into structurally higher energy demand growth than we were probably ready for,” Hamilton noted.

Chinese power outages

Power outages in China are also impacting industrial activity. The country has now resumed coal shipments from Australia after an informal ban in 2020.

“Chinese power outages are widespread. We are cutting more supply than demand,” Hamilton added.

Coal imports rose in September rose 76% year on year to 32.9 million metric tons, an Oct. 13 report from the Financial Times stated, itself citing official Chinese customs statistics.

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There doesn’t appear to be a lot of consensus around the copper market.

On the one hand, according to Reuters, the International Copper Study Group (ICSG) reports the global refined copper market will be roughly balanced between supply and demand this year. Meanwhile, the group forecasts a significant supply surplus in 2022.

The ICSG is predicting a small deficit of 42,000 tons this year. As for next year, it predicts a wave of new mine supply will push the market into a surplus of 328,000 tons.

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Copper price picture

copper mine

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But Goldman Sachs is suggesting otherwise.

It says mine supply is likely to underperform, be late and, most importantly, a wave of refining disruption in China due to power problems is going to restrict supply and drive prices higher.

Just last week Goldman predicted $10,500 per ton, only for the spot price to break though it shortly thereafter.

The difference between the price for spot or prompt metal and that for delivery in three months on the LME has hit a record $350 per ton, according to the Financial Times.

In short, it is displaying all the hallmarks of a market under extreme duress.

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We wrote recently about the impact power rationing and rising coal costs were having on metals producers in Europe.

Well, it would seem that is not the only driver pushing semi-finished product prices higher this month.

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Aluminum prices, alloying element shortages

aluminum ingot stacked for export

Olegs/Adobe Stock

The LME aluminum price been rising relentlessly. Furthermore, the availability of alloying elements is becoming so acute, both in terms of price and deliveries, that producers are sending out notes to clients advising that global shortages of raw materials like magnesium — critical in alloying higher grades of aluminum — could result in production stoppages and sharply higher prices later this quarter.

The problem, as is so often the case in the metals markets, is that China is the world’s largest source of alloying magnesium. That is in addition to a host of other similar metals, like manganese.

However, power rationing has impacted production there. European mills have no idea when this shortage will ease. They clearly feel the implications, both in terms of further price rises and delivery delays, which are so acute that they need to warn the market to set expectations.

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Before we head into the weekend, let’s take a look back at the week that was and the metals storylines here on MetalMiner, including aluminum prices, rising power costs and much more:

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Week of Oct. 11-15 (aluminum prices, power costs and more)

aluminum price

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MetalMiner should-cost models: Give your organization levers to pull for more price transparency, from service centers, producers and part suppliers. Explore the models now.

It was only a matter of time, as a fourfold increase in power costs for some heavy consumers, on top of environmental carbon emissions levies, have finally proved too much for some European metals producers.

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

European power costs squeeze metals producers

E.U. flag

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Nyrstar, the huge Belgium-based zinc producer, is the first major smelter — but it likely won’t be the last — to announce cutbacks.

According to Reuters, the group will reduce output by up to 50% from Oct. 13 at its three smelters:  Budel in the Netherlands, Balen in Belgium and Auby in France.

Most heavy users, like Nyrstar, operate on variable power cost depending on the time of day. As such, cutbacks are likely at peak times to manage input costs.

According to a post by S&P Global, Nyrstar’s fully electrified zinc smelter in Budel-Dorplein has an annual production capacity of around 300,000 mt, about 2% of global zinc supply. It is one of the largest smelters in Europe. The Balen smelter is one of the world’s largest zinc smelters in terms of total production volume, with approximate zinc production of around 200,000 mt/year as well as zinc alloy output of a further 200,000 mt/year.

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