We observed last month that the peak had passed in nickel prices and earlier suggestions from some quarters that nickel may hit $20,000 per ton were highly unlikely.

Any stainless consumers taking that on board and living hand to mouth will have seen surcharges come down and should have been able to trim stocks in line with falling input prices. Anyone who committed to bulk buys in Q3 will now be sitting on high-price stock as the nickel price — and with it stainless surcharges — continues to ease.

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MetalMiner’s Monthly Metal Buying Outlook offers more in-depth advice as to how to react to the nickel price falls and the current market (at least for those who are subscribers).

But the question on many buyers’ minds may be where is it all going from here?

It helps to better understand what has driven the price in recent months.

The LME nickel price has risen 54% since the start of the year, Reuters reported, driven in large part by a perceived supply shock in the form of an accelerated ban on the export of Indonesian nickel ore (a key raw material for Chinese pig iron and stainless-steel makers).

Further support for the nickel price has come in the form of a sustained outflow of refined nickel from LME warehouses, even since September inventory has continued to leave with live warrants down to just 42,000 tons from over 200,000 tons at the start of the year.

The supply-side picture sounds supportive; however, as we wrote last month, the problem is demand.

The market continues to worry about the trade war impacting Chinese manufacturing and, hence, demand, despite the Financial Times reporting this week that Chinese manufacturing expanded at the fastest pace in three years last month. The demand backdrop, though, is one of almost unending doom; reports of high stainless-steel inventory in China are not helping price sentiment.

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The risk remains to the downside, which is not what those holders of high-price stock would want to hear. However, for the time being, the nickel price seems to be following the rest of the metals sector: at best sideways and at worst toward further weakness.

Vertical integration may play well in classic corporate HBR (Harvard Business Review) circles, but steel industry observers may have a hard time envisioning the synergies Cliffs outlined in its merger announcement and presentation Dec. 3, creating a best-in-class, EBITDA-maximizing combined Cliffs-AK Steel entity!

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To us, the best rationale for the deal appears on slide 14, outlining AK Steel’s short-term debt position:

If you buy the notion that Cliffs can swallow AK and convert that company’s debts to its own and save on interest expense, then score one for the deal!

So why would Cliffs buy AK Steel?

A compelling reason appears on slide 11:

Despite AK Steel’s relatively improved financial performance under the leadership of CEO Roger Newport, if AK Steel represents ~30% of Cliff’s annual iron ore sales, Cliffs faces significant “customer concentration risk.” In other words, the health of AK Steel would significantly — negatively — impact Cliffs.

Forget about “renewal risk” — let’s just call it “customer risk.”

Cliffs would be hosed without a healthy AK Steel!

What about AK’s Ashland Works?

We continue to see different public announcements from AK Steel about the cost of Ashland Works. The Ashland Works facility today operates a hot-dipped galvanizing line (the blast furnace was idled nearly four years ago).

According to comments from AK Steel directly, “…the company announced it would close the ‘largely-idled’ Ashland Works facility by the end of 2019 to ‘increase utilization’ at its other U.S. operations. The plant employs 230 people and the closure would yield approximately $40 million in annual cost savings, according to the company.”

But by keeping it open, as detailed by Cliffs, the Ashland Facility, “Eliminates up to $60m of closure-related costs.” The Ashland facility will instead undergo a conversion, which it says, “Potentially provides a compelling, low-capex, high-return opportunity to be a significant merchant pig iron supplier in the Great Lakes.” (We presume U.S. Steel and ArcelorMittal will avail themselves of this compelling offering.)

So, we’re not sure if keeping Ashland Works open saves money or if closing it does.

We won’t pontificate over the “AK Steel best-in-class position in non-commoditized steel” for a variety of reasons that we have previously covered here in our GOES MMI series. (Or the fact that the rise of electric vehicles will start to make a dent in the need for the kinds of automotive exhaust grades, such as 439 and 441, produced by AK Steel.) We acknowledge AK does have a strong position in ultra-high-strength steels.

So, the real question comes down to the “synergies” outlined by Cliffs.

Does the margin Cliffs generates — approximately $30/$40 per short ton for every pellet produced and sold to AK — translate to an EBITDA jump of that same amount for steel products sold by AK, such that they leapfrog the EAF producers, as Cliffs suggests?

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Well, now isn’t that the $1.1 billion question?

Conventional wisdom has suggested we are headed for a significant oil surplus next year, with some commentators talking about a glut.

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Even respected industry publications like OilPrice.com headlined “IEA Warns Of A Looming Oil Glut Ahead Of OPEC Meeting” this past week, as global oil demand growth has slowed due to weakening economic growth and the continued trade dispute between the United States and China.

The suggestion is OPEC and its partners, principally Russia, are going to have to do more than just rein in a few transgressors of previous quotas like Nigeria and Iraq if they are to keep supply roughly balanced and avoid significant price falls, CNBC reported.

The International Energy Agency’s (IEA) position is premised on projections that non-OPEC supply will rise faster than recovering demand. The IEA sees non-OPEC countries adding another 2.3 million barrels per day (bpd) to their supply in 2020, while global oil demand growth is expected to be around 1.2 million bpd.

Of that amount, the U.S. is predicted by the IEA to add 1.2 million b/d to current levels in 2020.

But is that realistic?

Rig count is a fair measure of likely production growth, although not all wells need to be instantly brought onstream once they have been completed. Cost constraints, however, mean fracking firms rarely plug and store vast numbers of drilled wells.

There is a correlation between rig numbers as a measure of drilling activity and future production – particularly as shale oil wells have a limited life.

Those rig numbers have been falling — see the below graph from Oilprice.com — as we reported earlier this month:

Source: Oilprice.com

That comes partly as the investment market has been turning its back on the fracking industry. In general, the industry is struggling to access credit as easily as it did last year.

In 2018, the shale industry added about 2 million bpd. This year, it has added just a few hundred thousand in the first eight months of this year.

Finance is not expected to improve. Shale is not the hot topic it was – not least because of dire warnings of an oil glut (as demonstrated by the chart above).

In that respect, the U.S. shale industry is remarkably self-regulating. Activity and output, plus demand and supply, move in yearly cycles, rather than the decades of deep ocean or tar sands.

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Front-priced premiums have already begun to increase, suggesting a tightening market.

However, that doesn’t mean we are facing oil price rises. It may mean the price falls some in the industry fear may not be as likely or as deep as the IEA report suggests.

Global aluminum production in October totaled 5.39 million tons, according to a recent report by the International Aluminum Institute.

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Global production through the first 10 months of the year reached 53.04 million tons, down 0.9% from the 53.51 million tons produced during the first 10 months of 2018.

Of that total, China produced 3.01 million tons, which marked a decline from the 3.13 million tons produced in October 2018. However, China’s October production jumped compared with September’s 2.92 million tons.

Elsewhere, production in the Gulf Cooperation Council (GCC) countries totaled 494,000 tons in October, up from the 478,000 tons in September and the 450,000 tons produced in October 2018.

North American production totaled 316,000 tons, up 1.9% from the 310,000 produced in September but down from 323,000 tons in October 2018.

Western European production totaled 286,000 tons in October, up from 276,000 tons the previous month and down from 321,000 tons in October 2018.

Production in east and central Europe totaled 356,000 tons in October, up form 344,000 tons in September and 343,000 tons in October 2018.

MetalMiner’s Stuart Burns weighed in on aluminum demand and prices last month.

“China’s gross domestic product growth slowed again to 6.0% year over year in the third quarter, its weakest pace in almost three decades, Aluminium Insider reports,” Burns wrote. “Citing a Reuters poll, the report notes industrial activity is expected to have shrunk for the sixth month in October, quoting a Reuters poll, suggesting hardly any relief from slowing global demand and the trade war.

“The latest economic data from the E.U. and the U.S. also indicate slowing growth, with Germany flirting with a recession in the manufacturing sector. Although the aluminum market was estimated to be in deficit last year and this, a Reuters poll suggests it is likely to flip into a surplus of 304,000 metric tons next year — almost a 1 million ton turnaround from the 658,500-ton estimate for this year.”

Despite slowing growth and lagging demand around the world, aluminum prices had previously shown signs of upward momentum, surging past the $1,800/mt threshold in the first half of November.

However, since hitting $1,820/mt as of Nov. 8, the LME three-month aluminum price has lost some steam. The LME three-month aluminum price dropped to $1,738/mt in the run-up to Thanksgiving, according to MetalMiner IndX data.

Alumina production

Meanwhile, the International Aluminum Institute also released alumina production figures Nov. 26.

China’s estimated production of alumina — a key aluminum making material — totaled 6.08 million tons in October, up from 5.88 million tons in September but down from the 6.16 million tons produced in October 2018.

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Global alumina production totaled 110.3 million tons through the first 10 months of 2019, up 1.9% from 108.2 million tons produced during the equivalent period in 2018.

Global crude steel production took a fall in October, including in No. 1 steel producer China.

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According to statistics compiled by the World Steel Association — using data from 64 data-reporting countries — global steel production fell 2.8% in October on a year-over-year basis.

October production from the reporting countries totaled 151.5 million tons, down from the 155.8 million tons produced in October 2018.

China’s production contracts

China’s crude steel production for the month dropped 0.6% year over year to 81.5 million tons.

In September, China’s production growth reached 2.2% year over year, while August growth reached 9.3%.

With the Chinese winter heating season underway, it remains to be seen how much steel capacity is shuttered for the season.

As MetalMiner’s Stuart Burns recently noted, the government is taking a closer look at new capacity starts.

“Demand in top consumer China remains surprisingly robust, yet inventories are falling — suggesting producers are struggling to keep up with demand,” Burns wrote.

“If that were not enough, Reuters reported new starts are being more vigorously investigated and the approval process reviewed, leading the industry to think supply will be curbed further during the winter heating period this year.

“A notice jointly issued by the National Development and Reform Commission, Ministry of Industry and Information Technology (MIIT) and the National Bureau of Statistics urges local governments and the State-owned Assets Supervision and Administration Commission (SASAC) to verify the steel firms’ capacity, production and fixed-asset investments.”

No. 2, 3 producers see production declines

Meanwhile, No. 2 producer India put out 9.1 million tons, down 3.4% year over year. Japan produced 8.2 million tons, marking a 4.9% decline.

South Korean production reached 6.0 million tons, down 3.5% year over year.

U.S. production totaled 7.4 million tons, which marked a 2.0% decline compared with October 2018. The U.S. steel sector’s capacity utilization rate remains above the important 80% mark (identified as a marker of industry health when the Trump administration first rolled out Section 232 tariffs on imported steel and aluminum).

The American Iron and Steel Institute (AISI) recently reported the U.S. steel sector’s capacity utilization rate for the year through Nov. 23 reached 80.3%, having now held at that level over the past month and a half.

In the E.U., Germany produced 3.3 million tons, marking a year-over-year decline of 6.8%, as overall recession concerns loom in the E.U.’s industrial stalwart.

Italy produced 2.2 million tons, down by 3.7%. France’s production fell 10.6% to 1.2 million tons, while Spain’s fell 7.6% to 1.2 million tons.

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October steel production in Brazil, Turkey and Ukraine was all down by double-digit percentages in each country — 19.4%, 15.0% and 12.7%, respectively.

You could be excused in the U.S. for overlooking the fact that the U.K. is going through a snap election campaign.

Any such coverage of the U.K.’s upcoming election is being drowned out by the U.S. media’s hourly reporting of the varying prospects for the numerous Democratic contenders and the daily tussles between lawmakers and the current incumbent in the White House – all this before the 2020 presidential election year has even started.

British general elections rarely raise much interest outside the country, although Britain’s “first past the post” election system means the country has only experienced one peacetime coalition (2010–2015) since the Lloyd George ministry ended in 1922.

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Yet even with the potential such a system holds for more extremist parties to take power, the Brits have rarely voted in parties radical enough to cause ripples outside their own borders.

Dec. 12, however, may be a different matter.

Read more

gui yong nian/Adobe Stock

The U.S. steel sector’s steel capacity utilization reached 80.4% for the week ending Nov. 23, as steel prices have recently showed some signs of bouncing back as we inch closer toward 2020.

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Adjusted year-to-date steel production reached 87.20 million net tons at a capacity utilization rate of 80.3%. Production for the aforementioned period marked a 2.2% year-over-year increase, compared with the 85.29 million tons at a capacity rate of 78.1% produced last year.

Meanwhile, for the week ending Nov. 23, 2019, domestic raw steel production reached 1.86 million net tons at a capacity utilization rate of 80.4%. The weekly production total marked a decline from the 1.90 million net tons produced during the week ending Nov. 23, 2018 (when the capacity utilization rate reached 81.2%).

On a week-over-week basis, production for the week ending Nov. 23, 2019, declined 0.8% from the 1.88 million net tons produced the week ending Nov. 16, 2019.

By region, production totals for the week ending Nov. 23, 2019, totaled:

• Northeast: 203,000 tons
• Great Lakes: 673,000 tons
• Midwest: 193,000 tons
• Southern: 716,000 tons
• Western: 76,000 tons

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Steel prices continue slight gains heading toward 2020

Last week, we noted U.S. steel prices had possibly hit a bottom and appeared to start to gain some slight upward momentum as we head closer and closer to 2020.

U.S. HRC is up 4.42% over the last month, reaching $520/st to start the week, according to MetalMiner IndX data. Since mid-November, the U.S. HRC price has moved off of MetalMiner’s short-term support level of $475/st.

U.S. CRC, meanwhile, is up 3.05% over the last 30 days, up to $709/st. Like HRC, CRC has pushed off of MetalMiner’s short-term support level ($671/st).

U.S. HDG’s gains have been more significant, as it starts to approach MetalMiner’s short-term resistance level of $798/st. HDG is up 6.31% over the last 30 days, having reached $792/st early this week.

U.S. plate prices, meanwhile, are bucking the trend — as if often the case with plate.

Plate is down 15.41% over the last 30 days, down to $615/st to start the week.

In previous downturns, Beijing has taken a range of stimulus measures to keep the economy growing robustly; as a result, it has contributed positively to global GDP and commodity prices.

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But this time around Beijing seems to have a greater tolerance for slowing growth.

While stimulus measures are expected as early as December, the Financial Times reported, they are not expected to be on the scale of those seen in 2008-2009 and 2015-2016.

Freya Beamish, an analyst at Pantheon Macroeconomics, is quoted by the Financial Times as saying China’s stimulus in the 2018-2019 period will be equivalent to about 7% of GDP over the two-year period. Measures taken in 2015 and 2016 were worth 10% of GDP, while the 2008-09 stimulus amounted to 19% of GDP, according to an OECD estimate.

Beijing appears constrained by a number of factors, policy-driven and economic, in what it can do and how far it can go.

Office space is at an all-time high in some Chinese cities, forcing the delay and cancellation to high-profile skyscraper projects and more general office developments, the Financial Times reported.

Following a surge in new residential housing starts earlier this year, growth has since moderated and is expected to slow further in 2020. Beijing seems reluctant to undermine the currency by further monetary easing and is particularly sensitive to avoiding property price rises by stoking demand.

The Financial Times reports that Chinese states and municipalities are already heavily indebted and banks are reluctant to increase bad debts. While infrastructure lending is the most likely form of stimulus, it will probably not be on the same scale as previous measures.

A former Chinese bank official is quoted as saying that due to previous infrastructure investments, “Cities and provinces are having trouble financing new projects as they must spend a significant portion of their cash-paying off debt.” Possibly as a result of this, investment spending grew by only 3.4% in the first three quarters of this year.

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This moderation in appetite for further stimulus coming on top of the cooling housing market undermines the case made in a recent article we reviewed suggesting steel prices could be set for a recovery, extrapolating on the apparent recovery of the Chinese steel sector.

If the Financial Times is correct in its analysis above, any current strength in Chinese — and, by extension, southeast Asian — steel prices could be relatively short-lived.

According to the most recent report from the International Copper Study Group (ICSG), the global copper market through the first eight months of the year posted a deficit of 330,000 tons.

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Copper mine production slips

Global copper mine production dropped 0.5% on a year-over-year basis, according to the ICSG. Concentrate production was about flat, while solvent extraction-electrowinning (SX-EW) fell 1.5%.

Production in top copper producer Chile remained down, off 0.5% on a year-over-year basis due to lower copper head grades and supply disruptions.

Indonesian copper mine output dropped by 51% due to “the transition of the country’s major two mines to different ore zones leading to temporarily reduced output levels.”

In the Democratic Republic of the Congo (DRC) and Zambia, aggregate growth reached 13% in 2018 but was down 2% through the first eight months of this year due to “temporary suspensions at SX-EW mines, reductions in planned production and few operational constraints.”

On the other hand, output increased in Australia, China, Mexico, Peru and the U.S.

Elsewhere, Panama joined the ranks of copper-mining countries.

“Panama started mining copper earlier this year, with the commissioning of the Cobre de Panama mine, and is the biggest contributor to world mine production growth in the first eight months of 2019,” the ICSG said.

Refined metal production flat

On the refined metal side, output was about flat on a year-over-year basis, with primary production down 0.3% and secondary production from scrap increasing 1.8%.

Chilean output fell 32%, while Zambian output dropped 33%. Indian production was down 25%, as it continues to be impacted by the 2018 closure of Vedanta’s Tuticorin smelter (following protests by area residents).

The U.S., Japan and Peru also saw reduced refined copper output during the period.

Apparent refined usage up 0.5%

In addition, apparent refined copper usage increased by 0.5%, according to preliminary data.

China’s imports of refined copper fell 13%, but its apparent usage grew 2.4% due to higher refinery output, the ICSG said.

Global usage, ex-China, declined by 1.5%.

Copper prices dip slightly in October

On the price front, the average LME cash price in October checked in at $5,742.89 per ton, down 0.04% from September’s average of $5,745.48 per ton.

Meanwhile, the average price for the year through October, $6,007.69 per ton, marked a 7.9% decline compared with the 2018 annual average.

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As of the end of October, copper stocks at major exchanges — 431,192 tons — had increased 23% from stock levels in December 2018.

You could be excused for thinking gold has been eclipsed this year — bought in record amounts by central banks in the first half of this year — as the price rose strongly through the late summer but has since drifted off.

A recent report suggests, at least for some investors, gold has been sidelined in favor of a metal with stronger industrial applications, in addition to demand for jewelry and as an investment product.

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In the World Platinum Investment Council’s (WPIC) latest Platinum Quarterly report, the WPIC states that from a surplus of 345,000 ounces for 2019, investment demand in particular has been so strong that platinum is estimated to come out with a deficit of 30,000 ounces for the full year.

A 12% increase in total demand has been driven by a substantial surge in ETF buying, such that overall consumption is still up despite a 5% fall in automotive demand, a 6% fall in jewelry and a 1% fall in industrial demand.

ETF buying was particularly strong in the first half of 2019, the WIPC reports, but has carried on into the second half with the increase in holdings of nearly 1 million ounces. Much of the buying has been by large institutional investors looking to diversify from negative yielding debt equity increasing their holdings of gold and platinum. Such buyers typically work on a two- to three-year timeframe and, as such, are judging platinum has medium-term strength (despite weaker automotive demand).

Automakers have seen a collapse in diesel car sales, particularly in Europe (diesel cars’ top market). As a result, platinum has and will continue to suffer.

Palladium, on the other hand, is more efficient for petrol engine catalytic converters and has, as a result, done relatively well out of the swing in engine type demand. But at some price point, generally taken when palladium is double that of platinum, the latter can be used in place of palladium – its relative lack of efficiency meaning you have to use more platinum to achieve the same level of gas detoxification as you do with palladium.

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Platinum demand has been strong but prices have not fared as well as the other PGMs, such as palladium and rhodium, which have relatively done much better.

Even the upbeat WPIC recognizes the platinum market will be in surplus next year and above-ground inventory is expected to rise as a result of lower investment demand.

In the near term, that may mean there is a cap to prices at least in 2020, but clearly investors are betting on an upturn in the first few years of the next decade.