Russia

Crude oil fell sharply again as the International Energy Agency (IEA) cut its forecast for global oil demand for the 5th time. The lack of demand has been attributed to weakening global conditions and increasing supplies, especially coming from the US shale revolution.

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Crude oil is now at its lowest level since 2009, hurting anything tied to oil production. This can be reflected in the stock market of countries that export energy. The biggest foreign losers are  Russia, Canada, and several oil-rich South American economies such as Brazil and Venezuela.

EFA ishares since 2013 (developed countries excluding US and Canada)

EAFE ishares since 2013 (developed countries excluding US and Canada). Source: MetalMiner

Weakness in foreign developed markets can be seen in the chart above. The EAFE index (tracking 21 developed countries but excluding the US and Canada) is at its lowest level in 15 months. Most of the losses come from countries in central and eastern Europe with economies tied to Russia.

Emerging markets ishare (EEM) since 2013

Emerging markets ishares (EEM) since 2013. Source: MetalMiner

On the other hand, falling commodity prices are making emerging markets fall even more sharply. EEM ishares (tracking stocks in developing countries) fell by 17% in the past three months. The two biggest losers are oil producers Russia and Brazil, whose stocks markets fell by 48% and 35% since July.

Meanwhile, the US economy is in better shape than foreign economies, but it’s not immune to weakness in foreign countries. US stocks started to weaken in December and they will probably remain under pressure until the situation in foreign economies starts to stabilize. This will strongly depend on what crude oil does from here.

Russia is buying gold. Scrooge McDuck quantities of gold.

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The Russian government and its leader, President Vladimir Putin, have taken time out of their busy schedules – filled with moving more tanks into Ukraine and transferring long-range bombers to the Gulf of Mexico – to stockpile a massive amount of gold. The World Gold Council report points out that Russia’s central bank, Gokhran, accounted for more than half of the gold purchased by central banks in the 3 months ending with September.

pooty1_550

Can I interest in some of my hoarded gold?

The Russian precious metals and gems repository said it will likely start buying palladium in 2015, according to Interfax news agency, citing the head of Gokhran, Andrey Yurin. Gokhran is not a rival monster for Godzilla, but, rather, the State Precious Metals and Gems Repository under the Russian Ministry of Finance. It is responsible for the purchase, storage, sale and use of precious metals, precious stones, jewelry, rocks, and minerals by the State Fund.

Does this have something to do with Putin’s recent comments that he won’t “kowtow to the dollar dictatorship?” and will, instead, trade Russia’s oil in the rapidly falling ruble and China’s still-healthy yuan?

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The World Steel Association (WSA) has released steel production data for the first 9 months of the year.

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At 62.41 million tons (mt), the top 3 were China, Japan and the US. India was number 4.

In terms of production growth rate, though, India was in a slightly better position than the other top producers. The WSA data revealed that India’s steel production had grown by 1.8% over the first 3 quarters of 2014, which was the second-highest among the top 4 steel-producing nations. Last year, in the same period, India produced 61.27 mt of steel.

Still, India was no match for the world`s top producer, China, which produced 618 mt of steel, slightly more than half of the world’s total production of 1,231 mt. China also logged a 2.3% steel production growth.

Japan, the second-largest producer with 83.1 mt, did not have good growth figures, achieving a mere 0.8 % growth rate. Last year, in the same period, it had achieved a production rate of 82.4 mt.

The US stood at number 3 with production figures of 66.33 mt compared to 65.3 mt in the same period last year. Its steel producing capacity grew by 1.6%.

Russia and South Korea were tied at the 5th slot with 53.4 mt and 53.2 mt, respectively. But the latter managed to log an impressive 9.4% growth, the highest among major steel producing nations, while Russia managed 3.1%, according to the WSA report.
India’s steel companies were hardly cheering at getting fourth place in the world. All their attention these days, it seems, is focused on China and the happenings there. China’s factory output in August this year was the slowest ever in the last 6 years. In September, even its steel production remained static at 67.5 mt as compared to September 2013, according to the WSA data.

There was a film comedy from the 1960’s called “The Russians are Coming, the Russians are Coming,” a spoof about a Russian submarine that ran aground off the US coast and the invasion panic that ensued.

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Well, the US isn’t facing a Russian invasion today, but it may be about to face a Chinese one, or at least the steel markets may. According to the FT Chinese steel exports were a record 8.52 million tons last month, an increase of 73% from a year earlier, according to customs data. Hit by slowing domestic demand, tighter environmental regulations and growing debt loads that are becoming harder to pay back from sales to the domestic market, China’s steelmakers are looking to export their way out of trouble.

A Chinese customs spokesman is quoted as saying the industry is mired in overcapacity, a position confirmed by Kevin Dempsey, senior vice-president of the American Iron and Steel Institute, who is quoted by the paper as saying, “as the Chinese economy has slowed they are looking to export the steel that they can’t domestically sell and that’s disrupting markets around the world.”

The wording here is important. China is not (yet) directly flooding the US market. Most of the increase is flowing into other Asian markets, but in the process it is dislodging sales from these markets and not only pushing producers there to look for new outlets, but depressing global prices in the process.

Source: Financial Times

Source: Financial Times

US steel prices have held up relatively well this year compared to global levels, in part due to the more robust nature of the US recovery compared to the slowing growth trends in much of the rest of the world, but that could be set to change if China does not take action to slow the flood of steel exports. Beijing would face opposition from state governments if steel producers were prevented from selling excess production abroad. States are dependent on the tax stream from steel mills in the form of value-added-tax (VAT), not to mention local employment where steel mills may be the largest employer in the area.

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Defying all price logic, copper has weathered the storms of bad Chinese economic outlooks, a sub-prime-style lending scandal involving it as double-booked collateral, and even disappointing housing outlooks in the US as well as biggest customer China.

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Copper has shown the tenacity of the cockroach this week.

Copper has shown the tenacity of the cockroach this week.

Beset by a year of low prices and even worse economic news, copper has emerged as the unkillable cockroach of industrial metals just biding its time until we’re all gone and it can rebuild civilization along with fellow unkillable Keith Richards. Somehow, copper keeps getting up off the mat. Just this week Chinese investors showed faith in its outlook for 2015.

MetalMiner Editor-At-Large Stuart Burns pointed out that a lot of copper’s resilience has to do with inventory levels. “One of the support factors is LME stocks, which are at their lowest level since 2000,” he wrote, “with current headline inventory of 153,700 tons close to 6-year lows, while available tonnage, excluding metal that has been canceled prior to physical drawdown, is lower still at 116,600 tons.”

Now, if copper is able to keep its value through Q4 it’s actually looking at a nice price jump if the US and Chinese housing markets rebound in 2015.

Norilsk Looks to Buy Platinum From Russia, Itself

How hot has palladium been this year? Now Norilsk Nickel and its CEO/Co-Owner Vladimir Potanin want to buy it directly from Russia’s central bank. So convinced is Potanin that prices will go up next year that he’s willing to gather investors and put his own money into the deal. Norilsk is the world’s largest nickel and palladium producer.

Just how much palladium is in the Russian Federation’s vaults is anybody’s guess, but if President Vladimir Read more

“Have you ever known that you’re my hero…You’re everything I wish, I could be…
I can fly higher on the LME, because you are the wind beneath my wings.”

This may have been Bette Midler singing about her then-piano player Barry Manilow – except for the London Metal Exchange part – but this was finally the week when loyal, dutiful palladium stepped out from the considerable shadow of platinum and became a precious/industrial metals star in its own right, reaching a 13-year high on the LME (an astounding $911 an ounce) and widening the gap between itself and platinum as the favorite precious metal of traders this year.

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How high has palladium soared this year? It’s leaving the eagles in its dust. It’s singing “Copacabana” in Japan, China and the US, all markets where palladium bar finished up this week. It’s causing automakers to rethink using it for catalytic converters rather than substituting CHEAPER platinum in new cars. Yes, platinum is now the metal that you use to slum it and save a few pennies when it comes cleaning the exhaust air that your car spews.

Muffler exhaust

“Don’t listen to what that grifter platinum’s trying to tell you. I’m the one who’ll keep your emissions clean. Good ol’ palladium. I’ve always been here and always will be. Stardom won’t go to my head.”

How did this happen?

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Well, maybe the Russian president isn’t solely responsible for the 13-year-high price of palladium, but he’s sure doing his part.

Global-Precious-Metals_Chart_September-2014_FNL

Despite his recent “cease-fire agreement” with Ukrainian President Petro Poroshenko, Putin’s unchecked military support of rebel aggression in Eastern Ukraine has brought sanctions upon many facets of Russian business (most recently, as the FT reported, the upcoming World Cup to be played in Russia may be withdrawn). These sanctions directly affect palladium supply, of which Russia has a considerable amount.

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The long-awaited agreement between Russia and China on a $400 billion natural gas pipeline is seen by some as a political triumph for Russian President Vladimir Putin, who is courting partners in Asia as those in Europe and the US seek to isolate him over Moscow’s annexation of Ukraine’s Crimean peninsula, but an argument can be made that this should be seen as a sign of Russia’s weakness.

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That both the timing and eventual details of the deal – the full pricing and terms have yet to be fully agreed, let alone announced – have played in China’s favor with Beijing securing the advantage in a deal that has much to benefit both countries.

What China Wants

For China the supply of up to 38 billion cubic meters of natural gas a year from 2018 onwards – assuming the pipelines and infrastructure are completed on time – will help meet a demand that is anticipated to reach 420 bn cubic meters by the end of the decade according to the Telegraph. The growth potential for natural gas in China is estimated to be double its GDP growth. Not only does the country have a lot of catching up to do, but it’s current energy sources are giving it severe problems.

“Gas accounts only for 4% of China’s primary energy consumption, 19 percentage points below the world average,” according to a Reuters article, while in the rest of Asia, the average is 20%, and even in coal-dominated India it is 8%. Gas accounts for just 2% of China’s power generation, compared with 75% from coal. And therein lies China’s challenge: to wean itself off coal for power generation and, at least in northern states, for heating.

Coal is Strangling China

Coal is literally killing China. Due to a well-meaning but, in hindsight, maybe unfortunate policy during the 1950-1980 period, Beijing established free winter heating of homes and offices mostly via district heating systems, but due to financial restraints this was limited to those 321 northern cities deemed to suffer the harshest winter weather. The dividing line is the old imperial boundary roughly following the 33rd parallel along the Qin Mountains and Huai River, and hence has become known as the Huai River Policy.

This free coal may have kept the northern states warm, but at a cost that is more than financial. As a result of this policy and burning coal for power generation life expectancy in the north is 5.5 years lower than in the south “almost entirely due to an increased incidence of cardio-respiratory mortality,” a joint US/China research team said, according to  Reuters. “Estimates suggest that the 500 million residents of Northern China during the ’90s experienced a loss of more than 2.5 billion life years owing to the Huai River policy,” they concluded.

Pollution due to coal power and heating sources is still a major problem in China and the provision of natural gas as a power source is seen as a key element in reducing what is becoming a source of considerable social dissatisfaction, potentially of unrest. Those living in Japan and the Pacific Northwestern US should also welcome a reduction in acid rain and pollution from the burning of coal in China.

What Russia Wants

For Russia, the deal gives Gazprom an alternative to Europe which is by far Russia’s largest export market but, to keep it in perspective, even at 38 bn cubic meters China will still only be 25% of the exports Russia makes to Europe. This leaves Russia still highly dependent on European demand as that region seeks to diversify its supplies to the Middle East and North Africa, develops domestic hydraulic fracking and even possibly the US if LNG exports are permitted in any volume.

For steel producers, the prospect of gas pipelines running thousands of kilometers from Siberia to meet up with the still underdeveloped but growing Chinese gas network must have them popping the champagne corks. The $55 bn pipeline construction cost is Gazprom’s responsibility and you can bet steel oligarchs are already lobbying the Kremlin for a buy Russia policy. Even if foreign suppliers don’t get a look, Russian mills’ attempt to meet the substantial demand will mean they can’t export as much steel as they currently do, boosting the prospects for European and North American mills who currently face competition from those supply sources.

Who Benefits Most

Likewise, Chinese mills will have a substantial domestic market opened up to them, as the country invests in developing its natural gas transmission network, widely acknowledged to be underdeveloped and in need of extensive investment. Combined with demand from the open cycle gas turbine sector, supplying the still-nascent but expanding fracking market and China’s steel mills could be gainfully employed domestically rather than causing mischief overseas. So, rather than see this deal as a negative development, heralding greater cooperation and alignment of interests between Moscow and Beijing, we should see it as a commercial deal with benefits not just for the two parties but for the wider community.

 

Due mainly to strong palladium price movement – thanks to Amplats, Lonmin, striking South African miners, Vladimir Putin, and Americans buying cars – MetalMiner’s monthly Global Precious Metals MMI® clocked in a value of 95 in May, an increase of 1.1 percent from 94 in April.

Global-Precious-Metals_Chart_May-2014_FNL

Compare with last month’s trends – here’s our free April MMI® Report.

The US palladium bar price on our price index remained above the $800 per ounce benchmark that our lead forecasting analyst, Raul de Frutos, alluded to last month. South African miner strikes sure haven’t helped things, as they’ve bled into their 15th week. Amplats, Implats and Lonmin are now taking a different tack with worker negotiations, but a resolution doesn’t look severely imminent.

Sanctions on Russia amidst the ongoing Ukraine turmoil are affecting a number of precious markets; not only gold prices, but supply/demand expectations for palladium, as the country’s stockpiles play a role in price movements. According to ETF Securities, GFMS expects the palladium deficit to reach 1.3 million ounces in 2014 from a 1.0-million-ounce deficit last year.

To boot, US car sales continued to show healthy growth, rising 8 percent year-on-year in April – a good thing, unless you’re looking to spot-source palladium on the cheap.

What This Means for PGM Buyers

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Not so many years ago, a standoff between the world’s two Cold War superpowers would have had funds in a race to safe havens and commodity prices spiking, but the annexation of Crimea by Russia has left the markets largely unmoved.

Some commentators have put recent firming of commodity prices down in part to worries over Ukraine, but there is little evidence to suggest the political turmoil in and around that country is really having much impact on the market.

An initial fear was that the loss of Crimea would deprive Ukraine of sea ports for imports and exports, but a closer analysis revealed even to the least geographically sophisticated of us that Ukraine enjoys an excellent port at Odessa where the majority of its massive steel and grain exports are shipped out.

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In addition, Crimea has relatively little heavy industry and as such, from a purely economic point of view, has not rocked the country or the region financially – politically and culturally, of course, it is another matter.

So is Ukraine a damp squib in terms of fear factor for metals supplies?

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