LME copper

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This morning in metals news, copper slipped from its two-month high on the London Metal Exchange (LME), Canadian researchers have discovered a way to make metals processing greener and nickel hits its lowest price in a year.

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Copper Falls in Anticipation of Federal Reserve Interest Rate Decision

Copper fell from a two-month high on the LME — and dropped 1.1% on the Shanghai Futures Exchange — ahead of the U.S. Federal Reserve’s decision this week regarding raising the interest rate (which many expect it to do), Reuters reported.

The decision is scheduled to be announced Wednesday afternoon, after the conclusion of a two-day policy meeting.

An uptick in the interest rate is expected to shore up the dollar, making dollar-based commodities more expensive for holders of other currencies and leading to a dip in demand, Reuters reported.

Researchers Announce Environmentally Friendlier Way to Process Metals

A Canadian team of researchers recently announced a new method for processing metals without toxic chemicals or reagents, Science Daily reported.

The team outlined its approach in a recently published article in Science Advances. Through their method, the scientists seek to perfect a process that curbs the negative environmental impacts of processing metals, using easily recyclable compounds instead of toxic materials.

The discovery was the result of a collaboration between Jean-Philip Lumb and Tomislav Friscic at McGill University in Montreal, and Kim Baines of Western University in London, Ont.

As demand for electric vehicles grows and green initiatives become more visible, it’s not surprising to see movement toward making the entire production process going green — for example, from the processing of raw metals all the way to a final product itself (a “green” vehicle).

Nickel Falls to One-Year Low

It isn’t a good time for nickel, which fell to its lowest price in a year Tuesday in a climate of falling Chinese steel prices and a weak forecast for the Chinese economy, Reuters reported.

As the Chinese government tackles credit debts — the nation was recently downgraded by rating agency Moody’s for the first time since 1989 — many expect growth to slow in the second half of the year. That prediction has already been borne out by weak April and May Chinese economic data, according to the article.

Caroline Bain, chief commodities economist at Capital Economics in London, told Reuters that China’s efforts to rein in credit growth and curb excessive behavior on the property market is “bad news” for metals.

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Copper prices continued to trade flat in March. Over this month, strikes at major mines Escondida and Cerro Verde ended while Freeport-McMoran got a temporary export permit for its Grasberg mine.

Escondida’s Strike Ends

The strike at the world’s largest copper mine, Escondida in Chile, ended in the final week of March. The strike had lasted 44 days, longer than expected.

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The mine is not rushing to ramp up back to prestrike output levels. Owner BHP Billiton has said will outline the impact of the strike on Escondida’s output in results due for release on April 26. The strike is estimated to have cost Escondida more than 200,000 metric tons in copper production.

Copper MMI

Workers at the mine voted to return to work, despite not having reached an agreement on a new pay deal with management. Instead, workers extended their existing contract by 18 months, losing out on a new signing bonus or wage increase, but they will be able to renegotiate a new deal in 2018 after a new pro-union Chilean labor law goes into into effect.

Cerro Verde Mine Resumes Operations

Cerro Verde, Peru’s largest copper mine, had been operating at 50% of capacity since workers initiated a strike on March 10. At the end of the month, workers signed an agreement as the union accepted the company’s offer to improve family health care benefits and pay workers their portion of the mine’s profits earlier than usual. The mine produced just under 500,000 mt of the red metal last year.

Grasberg Mine Gets Temporary Export Permit

Freeport-McMoran was granted a temporary permit to export copper concentrates from its Grasberg mine in Indonesia, the world’s largest gold mine which also produces copper. The new permit broke a 12-week deadlock that had cut supply to Asian smelters. The new export license will last eight months. The amnesty means the company can renew deliveries of copper concentrates in Asia after declaring force majeure in February, but longer-term discussions over the company’s rights in Indonesia have yet to be determined.

What This Means For Metal Buyers

Copper supply disruptions have lasted longer than expected. Although they seem to have come to an end, their impact on supply still need to be outlined. In addition, these strikes have set the case for wage negotiations across the industry.

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Some major contract negotiations in large mines are due in the coming months. In the meantime, copper investors might focus their analysis on macro factors such as the ongoing China-U.S. trade negotiations, the performance of the U.S. dollar and global demand for industrial metals.

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Copper prices rose nearly 20% in November, a stellar rally that caught many by surprise… except us, of course.

Copper_Chart_December-2016_FNL

Following this sharp move, there were concerns about the pace of the metal’s gains. However, so far, the metal has shown resilience to giving those gains back. Indeed, it looks like copper still has fuel in the tank to move higher.

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Investors are pouring money into base metals as Chinese demand from infrastructure and construction continues to beat expectations. Momentum in copper is also being driven by hopes that U.S. President-elect Donald Trump will spend more on infrastructure. Stronger Eurozone and U.S. manufacturing PMIs also contributed support. Domestic PMI rose to 53.2 in November, the highest reading in five months and well above market expectations.

On November 30, OPEC agreed to curb its production to support falling oil prices. The news pushed crude oil prices above $50, providing support to commodity markets and metal prices.

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The International Copper Study Group (ICSG) estimates that global mined production will increase by 4% this year. But next year the ICSG is forecasting zero growth in mine supply. Even though copper markets are still in surplus, investors know that copper is a very slow business in terms of new project development. Consequently, even if prices continue to rise enough to incentivizee new developments, it will take a long time for that new supply to hit the market.

Despite analysts’ skepticism about copper’s rally, prices still have room on the upside. Given the ongoing price strength across the industrial metal complex, we see no reason not to remain bullish on copper.

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After rising strongly for the last month or more, copper prices now appear to be buffeted by every scrap of news that comes out.

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“Copper prices fell this week as investors cashed in gains after the previous session’s rally,” news.com in Australia reported yesterday. The gist of the argument seems to be the 23% rise in the copper price last month was a step too far. The site quoted Caroline Bain of Capital Economics saying “You only have to look at the levels of investor buying to see that quite a lot of these rallies have been based on euphoria rather than grounded in fundamentals. We think we will see some profit-taking inevitably as we end the year”

Reuters, on the other hand, took a somewhat contrary view, reporting copper prices climbing mid-week, buoyed by a pickup in U.S. manufacturing. The newspaper reported new orders for U.S. factory goods recorded their biggest increase in nearly 1-and-a-half years in October, evidence that the manufacturing sector is gradually recovering after a prolonged downturn and as demand signals from China also improve. Read more

Copper has burst to life on the London Metal Exchange after a year of choppy sideways trading. Benchmark, three-month copper has exploded to the upside, hitting a 15-month high of $5,443 per metric ton on Wednesday.

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As is the way with markets, the move is feeding on itself as shorts buy back positions and momentum-chasing funds join the action.

September Steel Shipments Down From August

The American Iron and Steel Institute (AISI) reported that for the month of September, U.S. steel mills shipped 6,769,312 net tons, a 10.3% decrease from the 7,542,605 nt shipped in the previous month, August 2016, and a 4.9% decrease from the 7,120,663 nt shipped in September 2015.

Shipments year-to-date in 2016 are 65,803,018 nt, a 0.5% decrease from shipments of 66,162,973 nt in the first nine months of 2015.

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A comparison of September 2016 shipments to the previous month shows the following changes: hot dipped galvanized sheets and strip, down 8%; cold rolled sheets, down 8%, and hot rolled sheets, down 13%.

Copper inventories are suddenly low on the London Metal Exchange and U.S. shale gas drillers are still beating the odds and producing oil for a profit.

Low LME Copper Inventory

A slide in copper inventories on the London Metal Exchange to the lowest levels in 18 months is prompting some speculators to shift bets away from volatile benchmark futures to spreads.

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The low levels of LME stocks is expected to send spreads between contract months rising as those holding short positions scramble to cover or roll over their positions.

Trading the spreads allows an investor to avoid having to take a directional view on the benchmark futures market, which has whipsawed back and forth recently, analysts said.

Reshalience

The long-anticipated fall-off in U.S. shale oil output is still proving slower and more tempered than anticipated, impeding the process of correcting the global glut that has walloped prices.

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This month, the Marcellus shale formation of the eastern U.S., the country’s biggest gas play, will yield 17.4 billion cubic feet a day, the U.S. Energy Information Administration said last week. That’s almost 2 billion cubic feet, or 11%, more than the agency had forecast last month.

Copper prices continued to make new lows in January. Prices fell below $2 per lb. for the first time since May 2009. Our Copper MMI tracking prices globally fell 5% to 58 points.

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Some investors see copper not only as a benchmark for base metal prices, but also as a benchmark for the state of the global economy. Right now, there is not much going in favor of copper. The global economy is having its worst moment since the global recession of 2009, at least from an investor’s perspective. Meanwhile, commodity markets continue to slide driven in part by a slump in oil prices.

The combination of lower copper and oil prices is specially hurting some copper producers that also have energy assets such as Freeport-McMoRan. The company is the world’s largest copper producer while oil and gas accounts for almost one-sixth of Freeport’s revenues. The company’s stock price fell 45% just in the first two weeks of January, after it hit a 13-year low in December.

Copper_Chart_February-2016_FNL

Copper investors are closely watching Chinese economic data, as China is the world’s largest consumer of copper. The year started on a weak note after the China’s PMI came at 48.4 in January. The index has been in contraction territory (below 50) since March 2015.

The Copper Lining

On the other hand, copper bulls could find some bright spots in January’s data. China is not self-sufficient in its copper requirements, so it imports the metal in large quantities. December’s trade data showed that Chinese copper exports increased sharply, rising hopes among copper bulls that the country’s copper demand might not be as weak as the current price trend depicts.

Copper import data will be something to watch in the months ahead as it will provide insight on whether the spike seen in December imports was something sustainable or more of a one-time blip.

Better than expected copper imports in January could give some support to copper prices although if China’s copper imports start dipping that could spoil investors’ sentiment.

Free Download: The January 2016 MMI Report

Another factor that could have some positive impact on copper prices is the recent dollar weakness. The dollar and dollar denominated commodities are inversely correlated. The Fed not rising rates in March could potentially cause the dollar to weaken in the months ahead. On the other hand, rising rates could trigger more sell-offs in copper and the rest of base metal prices.

What This Means For Metal Buyers

Other than better-than-expected Chinese copper imports in December, there is little going on to expect a turnaround situation in copper markets. While the slump in commodities continues and global markets slide, copper has little upside potential.

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The monthly Copper MMI® registered a value of 66 in September, a decrease of 1.5% from 67 in August.

Copper_Chart_September-2015_FNLThe red metal has done nothing but fall since its peak in 2011. A series of lower highs and lower lows put this metal in what we call a textbook bear market.

Copper downtrend since 2011

Copper’s downtrend since 2011. Source: MetalMiner.

The declines, however, were steeper this year. Investors particularly dislike copper, as worries about China’s economy are rising.

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China’s stock market crash and the devaluation of its currency are just aggravating copper’s bear market.

Weak demand in the face of a glut of metal keeps driving prices down. China is producing more copper and importing less, weighing on an already oversupplied market. China’s copper imports fell more than 10% this year to date, while its copper production rose 9%.

Manufacturing Demand Plummets

On top of that, China’s manufacturing PMI fell to a more than 6-year low of 47.1 in August. Construction and manufacturing numbers keep giving investors reasons to remain bearish.

With prices at these low levels, according to external sources, 17% of copper mines are producing at a loss. While many producers are aggressively doing all they can to move down the cost curve, others are also cutting production. Glencore PLC recently revealed plans to suspend production at two African mines. That will cut its copper output by nearly a fifth. These facilities will not operate for 18 months while the company builds lower production cost facilities to fight the current low prices.

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Many are arguing that we are close to the bottom of the cycle with copper. However, it could be some time before the demand picture changes or enough capacity is closed to impact prices. As copper has taught us over the past few years, better to wait for the facts than be too early calling for bottom.

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US auto sales remain the bright spot in the drivers of the monthly Automotive MMI®.

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Seasonally adjusted annual rate of sales for light vehicles rose to 17.8 million compared with 17.3 million a year earlier and was the highest since July 2005, according to researcher Autodata Corp. August was the fourth consecutive month that adjusted sales remained above the 17 million mark.

Automotive August-2015The Automotive MMI® still registered only a value of 73 in September, a decrease of 3.9% from 76 in August. Weak prices for most of the base metals that make up the index (HDG, copper, aluminum and lead) abound despite strong end user sales in the US. In China, auto sales are falling with the rest of the domestic economy there.

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China Again

Chinese auto sales fell by 7.10% in July 2015 compared to July 2014, the largest fall since February 2013 and such a large economy’s fall is dragging down the prices of automotive metals just as it is dragging down the prices of oil and other commodities.

Major iron ore producers, Rio Tinto PLC, BHP Billiton, Vale SA and Fortescue Metals Group Limited have ramped up production again despite massive iron ore and steel oversupply. Zacks.com believes they intend to continue exploring for iron ore in Australia despite lower growth forecasts from China and weaker iron ore prices, betting on continued strength in iron ore demand over the long term.

What This Means For Metal Buyers

This is normal behavior from major miners such as the Big Three (Rio, BHP and Vale) and almost-there cousin Fortescue. They can make a profit by squeezing volume out of their mines at low prices based on scale, alone, but iron ore investment is coming from non-traditional miners, as well.

India’s Essar Steel is making a $1.9 billion investment in the steelmaking ingredient in Minnesota, of all places. It’s difficult to imagine how such an investment makes long-term sense for Essar without a turnaround in both iron ore and steel prices. Since high-strength automotive steel alloys are one of the best-performing steel products on today’s market, it’s even more difficult to imagine those prices turning around without continued strong auto sales in the US and Europe and a turnaround in China and other emerging markets.

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This Month’s Prices and Trends

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Copper prices are dipping below the psychological basement support level of $5,000 per metric ton.

3M LME Copper since 2010

Three-month London Metal Exchange copper since 2010. Graph: MetalMiner.

The metal has done nothing but fall since 2011, but the declines have become steeper over the past few months. Investors particularly dislike copper, as worries about China’s economy are simultaneously rising. China’s stock market crash and the recent devaluation of its currency are just aggravating expectations of a further copper fall.

Meanwhile, China’s latest Purchasing Managers’ Index numbers fell to a two-year low, while construction numbers are still disturbing to investors. The slowdowns in the Chinese manufacturing and construction sectors are significantly hitting copper demand, or at least any hopes of demand coming back.

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