It was a book that closed with a pessimistic chapter for metals (and commodities in general), with many posting price declines as markets feel the effect of simmering trade tensions between the U.S. and China.
In our latest MMI report, you can read about all of the latest news and trends in our 10 metals subindexes: Automotive, Construction, Rare Earths, Renewables, Aluminum, Copper, Stainless Steel, Raw Steels, GOES and Global Precious.
A few highlights from this month’s round of reports:
According to Reuters, China is looking to shift the focus of its steel industry in 2019 from one of fast growth to more optimized, high-quality development.
The report cites Yu Yong, chairman of the China Iron and Steel Association, who said a major push in 2019 will come in the form of “optimising production structure, adjusting layout of steel mills and pushing merger and acquisition.”
China’s Aluminum Exports Surge
China’s exports of unwrought aluminum and aluminum products jumped 20.9% in 2018 year over year, S&P Global Platts reported.
Per the same report, December exports were up 19.8% on a year-over-year basis.
Steel often gets all the glory, but aluminum also had a big year.
From the U.S.’s Section 232 tariff announcement to the April aluminum price spike after the U.S. Treasury initially announced sanctions against Russian firms and their owners (including aluminum giant Rusal), there was plenty going on in the world of aluminum.
On the sanctions front, the U.S. Treasury announced it would delist several Russian firms previously targeted with sanctions (however, as MetalMiner’s Stuart Burns noted, the aluminum market reacted with a bit of a shrug this time around).
This morning in metals news, the aluminum price slides to a 16-month low, Liberty House could be looking to expand its presence in the Middle East and the mid-February deadline for the Section 232 auto investigation draws nearer.
In an interview with the Financial Times, Ross said his report is still a “work in progress” but also noted the president’s flexibility in terms of what he can do with respect to potential automotive tariffs.
The recently signed United States-Mexico-Canada Agreement (USMCA), inked during the Group of 20 summit in Argentina, included stricter auto content rules for tariff-free vehicle trade. The new trade agreement bumps the automotive content threshold from 62.5% to 75%. In addition, USMCA included a provision that 40-45% of auto content must be produced by workers making a minimum of $16/hour.
The non-event of the month was the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announcement this week of its intention to end sanctions on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo, all vehicles associated with Russian oligarch Oleg Deripaska.
Deripaska remains on the sanctions list. However, following his nominal separation from the firms, OFAC decided to end sanctions.
Deripaska is reported to have put plans in place to reduce his shareholding in holding company En+, which is currently 70% to fall to 44.95%, while a Russian bank will take title to a portion of Deripaska’s shares, according to Aluminium Insider.
The article states Deripaska will also be required under the agreement to hand over shares in En+ to charitable foundations and assign voting rights above a 35% threshold to a voting trust. Other shareholders deemed to have a familial or professional relationship will be compelled to do the same.
Once the entire plan has been executed, En+ will retain ownership of 56.88% of Rusal, with Deripaska’s stake reduced to 0.01%.
That’s good news, aluminum buyers may retort, and yes, it is in terms of finally settling a source of some disquiet that has been underlying the market since May.
But the fact that the aluminum price barely moved underlines the reality that the market had long expected this outcome — and barely reacted, accordingly.
What happens next year remains to be seen.
The whole metals complex has been at best trading sideways during the second half this year, buoyed by decent demand but depressed by worries about global growth and trade wars.
The lifting of sanctions frees up some 200,000 tons of Rusal primary metal sitting on the LME for consumption, and potentially 10 times as much sitting in off-warrant or off-market stock and finance trade storage.
The LME metal is unlikely to go anywhere fast. Currently, the LME supports rollover of maturing stock and finance trade contracts with two-year forwards at a sufficient premium to one-month forward to facilitate extension.
As such, the market is not going to be flooded with Rusal metal that would cause a further weakening of prices. That clearly is the market’s assessment, too, otherwise prices would have fallen significantly after the announcement.
This morning in metals news, the U.S. Treasury Wednesday announced it will lift its sanctions against companies owned by Russian oligarch Oleg Deripaska (which includes aluminum giant United Company Rusal), Chinese steel prices hit a five-week high and Alcoa cuts aluminum production amid a labor dispute at its Becancour smelter in Quebec.
“Treasury sanctioned these companies because of their ownership and control by sanctioned Russian oligarch Oleg Deripaska, not for the conduct of the companies themselves,” Treasury Secretary Steven T. Mnuchin said. “These companies have committed to significantly diminish Deripaska’s ownership and sever his control. The companies will be subject to ongoing compliance and will face severe consequences if they fail to comply. OFAC maintains the ability under the terms of the agreement to have unprecedented levels of transparency into operations.”
According to the Treasury Department’s announcement, it will terminate the sanctions imposed on En+ Group plc, UC Rusal plc and JSC EuroSibEnergo in 30 days.”
MetalMiner’s Take: LME aluminum prices have increased slightly today on the news knowing that the Trump administration will lift sanctions on Russian companies owned by oligarch Oleg Deripaska.
However, the increase does not appear sharp. Prices increased following the previous pattern, and aluminum prices are still lower than they were at the beginning of the month. This decision will not have a large impact on the aluminum market.
In April, when the sanctions were announced, the aluminum market felt constraint regarding supply; prices subsequently spiked.
However, current market conditions are far different from April 2018.
Crude oil prices are lower, commodities are decreasing and the U.S. dollar is rising. Also, Section 232 and all the other tariffs still remain in effect.
Therefore, buying organizations won’t see dramatic changes in LME aluminum prices, in both the short and long terms.
Alcoa to Cut Production at Quebec Smelter
Alcoa announced Wednesday that it will cut production by half at its Aluminerie de Bécancour Inc. smelter in Quebec.
“The Bécancour aluminum smelter, owned by Alcoa (74.95%) and Rio Tinto Alcan Inc. (25.05%), has nameplate capacity of 413,000 metric tons per year, across its three potlines,” Alcoa said in a release. “Two of the facility’s potlines were curtailed on January 11, 2018, after union members rejected a proposed labor agreement for hourly employees.”
Alcoa said curtailment of the one operating potline, which has a nameplate capacity of 138,000 metric tons per year, was “necessary to ensure continued safety and maintenance in light of recent retirements and departures.”
Alcoa and the union representing its workers still remain without a labor agreement almost a year after the other two potlines were curtailed.
“After extensive negotiations this year, ABI and the union have yet to reach an agreement on key terms to improve productivity and profitability,” Alcoa said in its release. “ABI’s management remains committed to reaching a negotiated agreement.”
According to Alcoa, curtailment of the one operating potline will begin Friday, Dec. 21.
This morning in metals news, the European Commission has extended its probe of steel imports, steel production in the Great Lakes region of the U.S. ticked up last week and Chinese aluminum companies will reportedly come together to discuss falling aluminum prices.
Chinese Aluminum Producers Will Gather Over Dropping Prices
According to a Reuters report, representatives from China’s biggest aluminum producers will gather to discuss falling demand and aluminum prices.
MetalMiner’s Take: A pow-wow amongst China’s top aluminum brass won’t impact the macro trends impacting metals markets.
The facts remain, oil prices have sunk, critically falling below $50/barrel, which has moved commodities markets lower.
Astute buying organizations know that commodities and industrial metals as asset classes show tight correlation (but not always).
Industrial metals as of Dec. 1 remained in a long-term bull trend and a short-term sideways trend. Cutting aluminum production makes sense in markets with weak demand. Demand from China appears sluggish, yet it remains unclear if Chinese aluminum producers will show the strength and unity in reducing production.
LME aluminum prices also fell in November. Aluminum prices appear weaker this month. However, prices have increased so far in December.
Source: MetalMiner analysis of FastMarkets
From last July until November, LME aluminum prices traded in the $1,970-$2,170/mt level. However, prices moved slightly below the $1,970/mt floor in November.
The politics of trade and financial uncertainty in China, rather than supply and demand in the aluminum market, have moved LME price levels.
Rusal Aluminum Market
Russian aluminum giant Rusal’s aluminum profits continue to rise while sanctions continue to get postponed, this time from Dec. 12 to Jan. 7.
Rusal primary aluminum production reached 940,000 tons in Q3, 1% higher year on year. Primary aluminum and alloys sales increased by 8.1% year on year to 1.05 million tons. Rusal aluminum exports increased by 4% in October compared to September.
China Alumina Market
According to the president of Aluminum Corp of China Ltd, alumina exports held steady in October. Chinese aluminum makers have exported unusually high alumina volumes in 2018 due to supply constraints.
Alumina tightness came as a result of the strike at Alcoa’s operations in Western Australia, the outage at the Norsk Hydro Alunorte alumina refinery and U.S. sanctions on Russia’s United Company Rusal.
September alumina exports were five time higher than August, rising to over 165,000 tons. The higher numbers come on the heels of advanced production in September-October before the winter cuts (Nov. 15-March 15).
However, unlike last year, Chinese production in 2018 will not have blanket requirements for 30% output cuts.
SHFE aluminum prices also fell this month, hitting their lowest level since October 2016. Current prices have fallen 13% from the beginning of 2018. SHFE trading volumes fell 37% from this time last year, which means buyer sentiment — and, therefore, prices — have fallen.
Source: MetalMiner analysis of FastMarkets
However, SHFE aluminum prices traded similarly to LME aluminum prices and increased so far in December.
U.S. Domestic Aluminum
The U.S. aluminum Midwest Premium has traded sideways in December.
The current price stands at $0.18/pound, the same level as November, and lower than the $0.20/pound level in April-May 2018. Despite the sideways trend, the current premium remains high.
Source: MetalMiner data from MetalMiner IndX(™)
What This Means for Industrial Buyers
LME aluminum prices appear weaker at this point. Tariffs, sanctions and supply concerns may act as a support to aluminum prices, both for LME aluminum and the U.S. Midwest Premium.
Adapting the right buying strategy becomes crucial to reducing risks.
Only the MetalMiner monthly outlooks provide a continually updated snapshot of the market from which buying organizations can determine when and how much to buy of the underlying metal.
For more information on how to mitigate price risk year-round, request a free trial to our Monthly Metal Buying Outlook.
At first sight, a link between oil prices and aluminum prices appears tenuous until you consider that the oil price is taken as a proxy for energy prices in general, particularly as fuels like liquefied natural gas (LNG) can be linked to the crude oil price.
So, here is one for you. If you would like a leading indicator to price movements for coal, steel and energy-intensive base metals, the South China Morning Post suggests, or at least links, pollution levels in major Chinese cities to production levels of steel and aluminum.
According to the argument, if pollution levels are high it is because production is high, and if production is high then the market is going to be oversupplied and prices will fall.
The South China Morning Post compares pollution levels this year to last around Beijing and other major eastern seaboard cities. Last winter, local government officials in Beijing restricted — or simply banned — the burning of coal across much of northern China, the article reports. Consequently, in early December average pollution levels in Beijing were less than half the concentrations seen in the previous two years.
Beijing’s citizens no doubt welcomed the blue skies. Unfortunately, coal is not just used as an energy source for electricity generation — it is also burned as fuel by millions to heat their homes, workplaces and schools, the South China Morning Post reports.
With industry slowing and reports of school children facing hardship, Beijing relented, and by late December to early January, the smoke had returned.
According to a company announcement, the $1.9 billion investment in the Amrun mine serves to replace production from the depleting East Weipa mine. The Amrun mine is expected to hit its full production rate of 22.8 million tons next year.
“Bringing Amrun online further strengthens our position as a leading supplier in the seaborne market. We have the largest bauxite resources in the industry and are geographically well positioned to supply China’s significant future import needs, as well as supporting our refinery and smelting operations in Australia and New Zealand.
“The Amrun mine will ensure generational jobs for Queenslanders and build significantly on our 55-year history on the Western Cape.”
The first shipment was hailed in a ceremony on the Western Cape York Peninsula, seeing the more than 80,000 tons of bauxite off to Rio Tinto’s Yarwun alumina refinery in Gladstone.
Rio Tinto, the world’s largest bauxite producer, produced 50.8 million tons of bauxite last year. Bauxite ore is the world’s main source of aluminum. Bauxite is refined into alumina, which is then refined into pure aluminum.
The miner’s announcement came after last week’s announcement of a $2.6 billion investment in the Western Australia Koodaideri iron ore mine, which the miner said will be its “most technologically advanced mine” once completed.
According to a Rio announcement, construction on the mine is set to begin next year, with production expected to begin in late 2021. The mine is expected to have an annual capacity of 43 million tons.
“Koodaideri is a game-changer for Rio Tinto,” Rio Tinto chief executive J-S Jacques said. “It will be the most technologically advanced mine we have ever built and sets a new benchmark for the industry in terms of the adoption of automation and the use of data to enhance safety and productivity.”