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October was the worst since 2012 for world stocks, one that casts doubt on the decade-long bull market for equities, according to the Financial Times, and by extension the fate of metal prices.

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Although China’s CSI 300 closed up 1.4% this week, it was a bit of a dead cat bounce after a decline of 6% during the month, as this graph from Trading Economics shows:

Source: Trading Economics

The Chinese market has fallen from a peak of around 3,550 to 2,600 over the year. Most attribute the recent minor recovery to yet more promises of infrastructure investment made by Beijing.

But China is not alone seeing stock market volatility.

The Financial Times reports comments made by analysts from Capital Economics, who noted: “While upbeat earnings numbers have helped the US stock market find its feet again in the past couple of days, the bigger picture is that the S&P 500 has tumbled in recent weeks despite healthy earnings. We think that this reflects worries about the outlook for them, which in our view are likely to intensify as actual earnings growth slows sharply next year.”

Those fears seem to have abated for now on the back of stronger earnings results coming out both in the U.S. and Europe, and suggestions the Federal Reserve may not tighten quite so fast has taken the dollar off its highs.

The strong dollar has been depressing commodity prices this year, with a slight pullback this week taking it off a 16-month high hit on Wednesday, according to another Financial Times report.

Source: Financial Times

Despite strong fundamentals and producers facing considerable price pressure from rising alumina prices, aluminum has fallen along with other metals, in part due to the strong dollar.

On-warrant stocks of aluminum in LME-registered warehouses have fallen by 1,825 tons to 723,900 tons, but that only tells part of the tight supply market story.

The market deficit has been fed by off-warrant inventory finding its way back on the market. Off-warrant stocks held by the stock and finance trade have fallen from an estimated 10 million tons a few years ago to something closer to 3-4 million tons today. The very opacity of that market makes it very difficult to judge stock levels and, as a result, impossible to accurately estimate the true size of the aluminum market deficit if this supply source were not there.

What it does say is outside of China, aluminum’s medium-term fundamentals are strong. There are very few new smelters being built and limited return of idled capacity, even in the tariff-supported U.S.

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Short-term price movements, however, are rarely driven by long-term fundamentals; the dollar and stock market sentiment will continue to exert volatility on the whole metals sector.

As the prospect of an additional $257 billion in tariffs on Chinese goods looms, China’s ambassador to the U.S. said the countries should look to their “better angels” to guide them toward a resolution of their trade dispute, the state-run Xinhua News Agency reported.

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During a visit to the National Press Club on Tuesday, Chinese Ambassador Cui Tiankai cited President Abraham Lincoln’s famous words, as the event included a screening of the film “Better Angels.”

“It has made great strides, while also has had its share of setbacks,” said Cui, as quoted by Xinhua, of U.S.-China relations. “But every time it risked being stranded, every time its future was cast into doubt, the people of our two countries would be there, quietly but persistently, doing their part, lifting it out of the quagmire, and moving it forward.”

The ambassador’s comments came after Bloomberg reported Tuesday that the Trump administration was preparing to impose an additional round of tariffs on Chinese goods worth $257 billion — in addition to the $250 billion in tariffs already imposed this year — if talks to resolve the conflict fail.

President Donald Trump and President Xi Jinping are scheduled to attend the Nov. 30 G20 summit in Buenos Aires.

In September, the U.S. imposed $200 billion in tariffs on a wide range of Chinese products, adding to the total $50 billion in tariffs that had already been imposed earlier in the year.

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In 2017, the value of U.S. imports of Chinese goods hit just over $505 billion, according to Census Bureau data (the U.S. had a deficit in goods trade with China of over $375 billion last year).

Brazil’s Institute of Environment and Renewable Natural Resources, known as IBAMA, has lifted the embargo on Norsk Hydro’s Alunorte alumina refinery, several headlines are saying, encouraging many to think full production of alumina will start flowing from Hydro’s massive plant in the near future.

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But while it is correct that IBAMA has lifted an embargo, it is only IBAMA’s embargo that is so far lifted — an embargo placed on the bauxite residue deposit area (DRS2).

The decision to lift the embargo came after successful trials of Hydro’s press filter technology earlier this month, in which the firm successfully demonstrated its “state of the art” — in Hydro’s words — technology could process bauxite residues to a high enough standard to satisfy SEMA, the local environmental agency in the state of Pará, that the new treatment area DRS2 would be safe.

However, the embargo on DRS2 from the federal court system remains in place; a return to 100% of production capacity cannot be resumed until that court order is lifted.

So while we are all aware of the crippling impact the restrictions have had on output from Alunorte and the resulting volatility news and counter news is having on the alumina market (and by extension aluminum markets), what is less clear is when it will finally be resolved. It is only by understanding the cause that one can appreciate why it is taking time to achieve a solution.

The Court of Justice of Pará ordered Alunorte on Feb. 28 to reduce to 50% of production capacity at its alumina refinery, according to Norsk Hydro press releases, following concerns that the heavy rains led to leaks from the bauxite residue deposit containment ponds to the nearby river, causing contamination. The court also required Alunorte to suspend its operation of the bauxite solid residue deposit DRS2, and that a new operating license would be granted only when the integrity of the deposit was fully verified.

The decision to reduce output by 50%, rather than close it completely, was in part due to a determination made by the Secretary of State for Environment and Sustainability of Pará (SEMAS) that the Alunorte refinery could safely operate at 50% of capacity, but also recognition that with the Brazilian state and partner in the plant and nearby aluminum mill Albras were heavily reliant on Alunorte’s alumina, a full closure would have been catastrophic.

To read Norsk Hydro’s press releases, one would think we are talking of fresh water discharges from a leaky pipe or run-off from a coal shed roof, but the reality is more serious than that.

As a Norwegian site reported back in the spring, the series of discharges into the local river were unlicensed and, although the authorities were notified, the local population was not.

In addition to treated water, the toxic bauxite residue deposit known as “red mud” was also released during February of this year, risking the prospect that drinking water supplies downstream of the plant were polluted for several hundred families. Norsk Hydro would claim the releases happened at a time of heavy rains and were needed to release pressure on containment pools, which it must be said did not fail, as early reports suggested.

However, SEMA rightly questioned why, in an area with typically high seasonal rainfall, the pools were not designed to cope with such conditions. The releases were not accidents but the result of deliberate decisions. If the decision to ease pressure by releasing was taken then, so too could a warning to the local population not to drink the water until the pollution had passed and it was again safe.

To what extent the 50% restriction on Alunorte is a punishment and to what extent it is a precaution contingent on guarantees new measures are in place prior to a return to full capacity is unclear. There is a fair combination of economic necessity, environmental safeguards and no doubt politics in the mix.

At some stage, full production will resume — possibly by the end of this year, now that this new press refining technology has been approved.

Since Alunorte is such a key part of the alumina supply chain, aluminum mills’ margins have been under pressure as a result of the elevated alumina prices.

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At full capacity, the plant can produce some 6.4 million tons of alumina, or 10% of the world’s capacity outside China. Its impact on the alumina market has been likened to that U.S. sanctions on Rusal had on the aluminum market (another still unresolved source of potential volatility).

Growth is stabilizing in E.U. steel markets, according to the director general of the European Steel Association (EUROFER), but the sector nonetheless faces challenges, including trade barriers and high import levels.

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“Growth is stabilising in EU steel markets, in line with expectations,” said Axel Eggert, EUROFER’s director general in a release late last week. “However, the various challenges facing the sector will impact us in the coming months. Trade tensions could clearly upset the market’s balance, as could slowing demand in other parts of the economy.”

According to EUROFER, E.U. steel consumption in the second quarter jumped 4.4% year over year.

“Healthy levels of real steel consumption, in combination with stockbuilding in the steel distribution chain in this period, led to this growth,” the EUROFER report states.

Domestic deliveries from E.U. steel mills, however, were outpaced by imports.

Domestic deliveries rose 3.7% year over year, while third-country imports jumped 9.8%. The E.U.’s steel import market share rose from 23.2% in the first quarter to 25% in the second quarter.

“The continued, marked increase in import supply in the second quarter appears to confirm previous concerns about third country exporters pushing extra volumes to the EU market in anticipation of safeguard measures, and a willingness of buyers to take certain speculative risks,” the report states.

E.U. apparent steel consumption is forecast to rise 2.2% in 2018 and 1.1% in 2019.

With that said, ever-looming trade tensions could have an impact on steel demand, EUROFER notes, particularly with respect to the U.S.’s Section 232 automotive investigation.

Already in play is the U.S.’s 25% tariff on steel. The E.U. originally secured a temporary exemption from the tariff this spring (along with Canada and Mexico), but that was allowed to expire June 1.

In July, the E.U. announced the imposition of provisional steel safeguards, aimed at defending against supplies of steel diverted from other countries as a result of the U.S. tariff. The safeguards went into effect July 19, and are permitted to remain in effect for a maximum of 200 days. The European Commission is expected to make a final decision on whether to make the safeguards permanent by early 2019, according to a July release.

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As for steel-using sectors, output is forecast to grow by 3.5% in 2018 and by 1.8% in 2019, according to EUROFER.

Global crude steel production in September rose 4.4% compared with production in September 2017, according to the World Steel Association’s monthly production report.

The percent change represents an increase from the previous month, when August production rose 2.7% compared with August 2017.

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Global crude steel production hit 151.7 million tons (MT) in September, based on data from the 64 countries reporting to the World Steel Association. The 2018 high came in May, with a reported 154.7 MT produced that month.

Through the first nine months of the year, production reached 1,347.0 (MT), marking a 4.7% increase compared to the same time frame in 2017.

Production by Region

The monthly report also breaks out production by region or trading blocs.

Asia produced 946.8 MT of crude steel, marking a jump of 5.5% over the first nine months of 2017.

The E.U., meanwhile, produced 128.0 MT of crude steel in the same time frame, up by 1.3%. North American production reached 89.7 Mt, marking an increase of 3.4%.

Within the Commonwealth of Independent States (CIS), which includes Russia, 76.2 MT of crude steel were produced, marking a 1.8% increase.

Chinese Production Jumps Ahead of Winter Cuts

On a monthly basis, China saw its September growth rate nearly triple compared with that of the previous month.

China produced 80.8 MT in September, marking an increase of 7.5% compared with September 2017 production. Meanwhile, August production increased 2.7% from the August 2017 figure.

China’s crude steel production has breached the 80 MT mark in each of the last five months of reported data, last falling below that mark in April (76.7 MT).

Production figures in China bear monitoring in the coming winter months. Last month, Beijing announced a shift in its policy toward winter capacity cuts (aimed at tackling pollution in the country), ditching blanket bans and instead delegating capacity cut guidance to local authorities.

In September 2017, Chinese crude steel production hit 75.2 MT before falling to 72.4 MT in October and 66.2 MT in November.

U.S. on the Rise

U.S. production continues to rise, as the U.S. steel sector aims to breach the 80% capacity utilization mark. (As we noted previously, the U.S.’s capacity utilization rate hit 77.7% as of Oct. 20.)

The U.S. hit 7.3 MT in September, an increase of 9.0% compared to September 2017.

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Around the World

Other highlights from the monthly production report:

  • France produced 1.3 MT, up 1.4% from September 2017.
  • Japanese production dipped. Japan’s 8.4 MT in September marked a decrease of 2.4% compared to September 2017.
  • Italy hit 2.2 MT, down 0.8% from September 2017.
  • Spain’s production reached 1.3 MT, marking a 5.1% surge from the September 2017 total.
  • Turkey saw its production drop 5.9% year over year in September, reaching 2.8 MT for the month.
  • Brazilian production hit 3.0 MT, up 2.5% from September 2017.

Ford Motor Co. released its Q3 financial results on Wednesday, two days after President of Global Operations Joe Hinrichs said the U.S.’s tariff on steel have made U.S. steel more expensive than steel from anywhere else in the world.

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The automaker posted third-quarter net income of $1.0 billion and $1.7 billion in adjusted EBIT. Net revenue rose 3% year over year in the quarter.

Following the automaker’s release of its third-quarter earnings results, Ford shares surged Thursday, marking Ford’s biggest one-day percentage increase since 2011, according to MarketWatch.

CEO Jim Hackett highlighted the automaker’s plans with respect to its lineup.

“By 2020, we expect 75% of our lineup in the U.S. to be new or refreshed,” Hackett said during the earnings call Wednesday.

Hackett later added that during the April earnings call, the automaker said it could hit an 8% EBIT margin and an ROIC in the “high teens,” assuming “reasonable economic conditions.”

“The news today is that the current external environment has driven higher costs and uncertainty for the entire sector,” he said. “As we said last quarter, we had an unexpected deterioration in our business in both Europe and China. As a result of these factors, our current forecast shows we will not reach our EBIT margin and ROIC targets by 2020.

“However, I tell you as I told the board, we’re not standing still. We are attacking everything that is in our control.”

Chief Financial Officer Bob Shanks also walked through the financial numbers, noting that revenue was down compared to previous quarters. Revenue in the third quarter reached $37.6 billion, down from $38.9 billion in Q2 and $42 billion in Q1; Shanks attributed the decline to lower volume.

Revenue in the third quarter, however, was up 3% compared with Q3 2017, when it hit $36.5 billion.

“Some of this is seasonal, reflecting the normal summer plant shutdowns that occur in Europe and North America,” Shanks said.

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Ford’s EBIT and EBIT margins were flat in the third quarter compared with the previous quarter.

The ripples continue to spread across the pond of international trade from President Trump’s steel and aluminum tariffs.

In a recent post from India reported in Aluminium Insider, an analysis of the scrap, primary and downstream semi-finished metals trades into and out of India reveal how economies on the other side of the globe are grappling to contain the fallout of U.S. sanctions.

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India is becoming a growing force in the global aluminum market. With domestic bauxite reserves, relatively low cost (if environmentally polluting) coal-fired power and a huge domestic market, it should come as no surprise the country has invested heavily in aluminum production.

Naturally, that investment, much of it led by the private sector, is patchy and not fully integrated. The country imports significant quantities of scrap for its growing die casting industry, in large part because, as a newcomer to aluminum consumption, domestic arisings are far too low to meet demand.

The article states India’s overall scrap imports have risen 24% year-on-year, so far fueled by cheap U.S. exports looking for a home after China raised import tariffs. Domestic primary producers are complaining because die casters and billet casters are therefore incentivized to use more scrap than primary metal.

Primary producers are facing competition not just from scrap, the article explains. India is facing increased imports of wire rods and aluminum alloy ingots from the Association of South East Asian Nations (ASEAN) region. India signed free trade agreements (FTAs) with the countries comprising the ASEAN at a time when market dynamics allowed Indian producers to compete more effectively.

Now, with duty-free trade and a distorted regional market awash with product, India has become a target for excess supply.

Read more

With just over two months left in the calendar year, one can look back and see what a bumpy road it has been for some metals.

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Not so for palladium.

The platinum-group metal (PGM) hit a record high Tuesday, Reuters reported, on account of tight supplies and, to some extent, worries over a potential increase in tensions between the U.S. and Russia.

As we’ve noted in this space in the past, fellow PGM platinum has historically traded at a premium to palladium. That has changed in the last year.

As MetalMiner’s Taras Berezowsky noted earlier this month, palladium breached the $1,000 per ounce mark for the first time in eight months.

In the ensuing weeks, the price has continued to rise, hitting $1,090 on Monday, according to London Platinum and Palladium Market data.

On Tuesday, the price surged to $1,150.50 per ounce, breaching the 2018 high set in January ($1,128).

Palladium is used, among other applications, in automotive catalytic converters, used in car exhaust systems to process polluting gases into less harmful gases.

According to Reuters, some analysts indicated the U.S.’s plans to withdraw from the Intermediate-Range Nuclear Forces Treaty could result in Russia restricting supply of the metal (Russia is the world’s top palladium producer).

In terms of U.S. production, in 2017 “one domestic company produced about 16,900 kilograms of platinum-group metals (PGMs) with an estimated value of about $480 million from its two mines in south-central Montana,” according to the U.S. Geological Survey (USGS). 

Furthermore, according to the USGS, 25% of the U.S.’s palladium imports from 2013-2016 came from Russia, just behind South Africa (30%), which has been the U.S.’s leading source of the metal. Russia produced an estimated 81,000 kg of palladium in 2017.

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Given palladium’s sharp upturn, however, it bears watching, as a correction could be on the way.

Readers in North America can be excused for puzzling why Europeans worry overly about the so-called “Eurozone crisis.”

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They seem to come around periodically. There is a great deal of noise and some volatility in the stock markets, but eventually — whether it is Greece, Spain, Portugal, Ireland, or a combination of several economies — the E.U. seems to have muddled through such crises over the last decade.

Even Brexit is confining its impact to the U.K. economy and has largely left the rest of the E.U. unaffected. But Italy’s latest budget proposals hold the potential for serious disruption, not least because it is the Eurozone’s third-largest economy and a founding member of the trade agreement started in the years after World War II — so its impact is proportionately significant.

So, what is the problem this time, you may ask?

Well, Europe has been slow to recover from the financial crisis of 2008. Debt ballooned in many countries and under the constraints of a fixed currency managed to the advantage of rich northern states like Germany, balance of payments deteriorated as the north imposed austerity on the south (or so many southern states saw it).

The rights or wrongs of the Eurozone’s structure aside, countries like Italy have been constrained for the last decade by fiscal rules set in Brussels. The Italian economy has lagged behind the rest of Europe — unemployment is high and growth is low. As the graphs below courtesy of Stratfor illustrate, the populace has had enough.

Earlier this year, they even surprised themselves by voting in a populist coalition on a platform of radical reform and reflation. That is a policy that puts them at loggerheads with Brussels, which has demanded an Italian deficit reduction that should see the deficit grow by just 0.6%, down from an expected 1.6%, to be achieved by increased austerity measures.

Italy’s new government, a coalition of the Five Star Movement and the League, have presented Brussels with a budget that would see the deficit rise to 2.4% next year, three times higher than an E.U.-mandated target and which Barclay’s Bank is quoted as predicting in The Telegraph will likely exceed 3%, even without a global economic downturn next year.

Italian 10-year debt yields have surged as a result, up near 300 points, not quite at the 400 level seen in the crisis of 2011 but a record four-year high. So far they are only talking about the budget, but nothing has been implemented. After years of QE, banks are holding some €387 billion (U.S. $444 billion) of state debt.

As The Telegraph report observes, banks face mark-to-market losses as yields rise. This erodes their capital buffers, forcing them to curtail lending and further crimping growth. Or, they might have to sell some of their bonds, creating pressure for yields to rise higher.

Either action can quickly turn into a self-feeding “doom-loop,” the paper suggests, as the banks and the sovereign state take each other down.

There is not going to be an Italian sovereign default. Although there are reports of capital flight to Switzerland, it is very unlikely there will be a run on Italian banks as there was in Greece.

However, Italy’s sheer size and core membership of the Euro means Brussels and Rome cannot allow the current standoff to escalate out of control.

Like a runaway super tanker, the situation cannot be easily contained like it was in Greece if the markets genuinely take fright.

You have to have some sympathy for Italy. State spending has always played a massive part in keeping a country together, where geography, history and culture constantly try to tear it apart, a report by Stratfor observed.

Reports of riots in Rome over the appalling state of public services underlines the popular will for public investment, regardless of austerity measures demanded by Brussels. So far, the government has a clear popular mandate to ignore Brussels and go for debt-fueled growth.

Brussels, likewise, is equally set against allowing Italy to buck the rules. The two are on a collision course and set against a backdrop of slowing global growth — outside of the U.S., at least — the economics are not in either party’s favor. Global growth or risk appetite are not going to mitigate the impact of an increasingly indebted Italian economy.

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The stage is set for a potential crisis.

We are not there yet, but in an increasingly nervous investment climate, it could prove a factor in a wider global stock market fall and global retrenchment.

For those wondering how the surge in domestic steel prices have impacted many domestic steelmakers, there is perhaps no better indicator of that impact than quarterly earnings reports.

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Steelmaker Nucor Corporation reported its third-quarter earnings late last week, reporting net earnings of $676.6 million. That total is up from $254.9 million in Q3 2017, but down slightly from Q2 2018’s $683.2 million.

In addition, through the first nine months of the year, Nucor reported net earnings of $1.71 billion, up significantly from the $934.8 million reported for the first three quarters of 2017.

“The strong financial performance we have had this year continued into the third quarter, and we are on pace for 2018 to be a record year for earnings,” Chairman, CEO and President John Ferriola said in a release. “Our financial results are evidence that Nucor was primed and ready for this long-awaited upturn in the steel market. Our strategic initiatives, including capital projects, acquisitions and enhanced customer engagement, as well as our active participation in industry trade actions, have solidified our industry leading performance. Our extensive investments have grown our peak earnings power and enhanced our many competitive strengths.”

Rising steel prices have uplifted U.S. steel companies this year, with many committing to significant operational investments.

In September, Nucor’s board of directors approved a $650 million investment aimed toward expanding its flat-rolled sheet steel mill in Ghent, Kentucky. According to the firm, the investment would increase the mill’s capacity from 1.6 million to 3 million tons.

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Looking ahead to the fourth quarter, Nucor projects earnings to decline compared with the third quarter, but also expects them to exceed Q4 2017 earnings.

“However, we expect the fourth quarter of 2018 to be another strong quarter as we believe earnings will be noticeably higher than those generated in the fourth quarter of 2017,” the Nucor release states. “We continue to believe there is sustainable strength in steel end use markets.”