Russia

vladimir putin LME aluminumRussian President Vladimir Putin declared force majeure on all Russian aluminum exports to the US and Europe following the recent ruling in favor of primary producer UC Rusal against the London Metal Exchange (LME) for new rules designed to cut long aluminum load-out rates.

Despite Rusal’s win in the high court, the Russian president appeared defiant against Western demands for diplomacy with the situation in Ukraine. “I am sick and tired of hearing about these threats of sanctions from the West against us…therefore I have preemptively declared force majeure on all aluminum exports effective immediately,” the angry president told Interfax, a news agency, early on Tuesday.

“Now the West can have a taste of their own medicine,” he said.

With an estimated 9 percent of total world production of primary aluminum ingot, Putin’s declaration will likely cause dramatic price spikes for aluminum. In fact, MetalMiner predicts LME prices will steadily increase while Midwest premiums may skyrocket.

Read more

All in all, Europe is too deeply engaged economically in Russia, and Russia in Europe, for either side to let this get out of hand. (We delved into the numbers of the economic relationship between Russia and the EU in Part One here.)

Sanctions against individuals are one thing, and for sure, vested interests in the US and Europe are leading the arguments for sanctions against specific industries, but consumers generally are hoping the pressure will be focused on the political elite rather than the free movement of goods.

They should take some heart from President Obama’s statement that “Washington was considering sanctions against key economic sectors in Russia….if Russia made military moves into eastern and southern Ukraine,” saying in essence, we know we have lost the case on Crimea but thus far and no further.

That’s a stand with more credibility and one Vladimir Putin will find harder to argue against with his case for military action. Western Ukraine is not the majority Russian-speaking population that Crimea is; the grey area is eastern Ukraine outside of Crimea, which is more pro-Russian, has many native Russian speakers and where it would be easy to stir up reaction against Kiev and its more pro-Western integration.

Here Moscow is probably itching to act, and while it could do so with impunity from a military point of view, the fallout economically would be much more serious. Even Europe would be forced to act – let’s hope it doesn’t come to that.

Back to the Effect on Commodities

For Russia, Ukraine is a highly emotive issue and when emotions run high, irrational decisions are sometimes taken.

The consequences could be serious for Western firms, but they could potentially be terminal for some Russian companies, many of which in the commodities sector are deeply indebted following rampant acquisition activity prior to the financial crash, such as Rusal. A sharp drop in the ruble and being denied access to ready supplies of funding to roll over debts would put many in trouble.

Let’s hope Mr. Putin’s industrialists are urging caution behind the scenes, even as they cancel their personal travel plans following the targeted sanctions imposed so far.

FREE Download: 7 Metal Buying Strategies for 2014 (Base Metals, HRC, CRC)

Anyone trading extensively (or even in a limited fashion but for key components) with Russia is no doubt anxiously watching developments in Ukraine and the almost-daily ramping up of tensions on both sides, with threats of sanctions countering military posturing.

Reuters reports that both the ruble and Russian stocks are down sharply on Thursday and Friday of the week before last, respectively. This was largely as a result of comments by US President Barack Obama that Washington was considering sanctions against key economic sectors in Russia, including financial services, oil and gas, metals and mining and the defense industry, if Russia made military moves into eastern and southern Ukraine.

FREE Download: The Monthly MMI® Report – price trends for 10 metal markets.

Trade in goods between the two countries was worth $38.12 billion in 2013 and US firms have $14 billion in direct investment in the country. Firms from Boeing down to mom and pops regularly import metals and metal products from what is one of the world’s largest commodity exporters.

Read more

Don’t you just love stories of intrigue?

Well, sure, when they are just stories – but if there is the possibility that they are a fair reflection of real events and that there is the possibility the consequences could affect us all, they become less curiosity and more a source of alarm.

So portends an article in the Telegraph this week, reporting a meeting said to have taken place between Russia’s Vladimir Putin and Saudi Prince Bandar bin Sultan, head of Saudi intelligence, three weeks ago in Mr. Putin’s dacha outside Moscow. The gist of the story is the Saudis are seeking support from Russia in pressuring Syria’s President Assad to stand down in return for a Saudi-Russian pact on the oil price and agreement on “managing” the European market for oil and natural gas/LNG.

Read more

We are going to say something a little controversial here: it could be argued that the problem of global oversupply in the aluminum market is not most people’s focus of China – it’s Russia.

The pace of new smelter construction in China has been truly breathtaking, and it is probably fair to say that at no time in the history of the industry has so much capacity been added so quickly anywhere in the world.

Far from abating, as Chinese GDP growth has slowed and aluminum inventories around the world grow, new capacity continues to be added in China as we write. HSBC estimates a further 12.7 million tons could be added by 2016, as the Chinese aluminum industry seeks to monetize low-cost coal reserves in the northwest.

Source: HSBC

Read more

As the above graph shows, total percentage returns for the huge industrial metal and raw material producers, who’d attended last week’s Reuters Metals and Mining Summit, have not really been all that hot — indeed, rather cool to cold — over the past year. Sovereign debt concerns, cooler global industrial demand, strikes, natural disasters and declining ore grades all play a role in the current metals climate.

The summit serves as a platform for these companies to come together and prognosticate, and for reporters to relate what these guys say — whether there’s much to back it up or not. If anything, though, benchmarking market activity against companies’ words and predictions could have value.

In case you missed the day-to-day reporting, let’s touch on some important announcements and news nuggets, all originally reported by Reuters, that might affect industrial metals markets and metals prices in the next year (or two, or five…)

  • Rio Tinto (-20.6% return over last 12 months) said things look pretty optimistic as far as finding buyers for parts of its aluminum business go. The aluminum market (with prices plummeting about a fifth since May 2011) has caused Rio to lose money since it dropped big bucks on Alcan, and they want to improve their aluminum margins by focusing on their Canadian operations. Rio also has its sights on Mongolia’s Oyu Tolgoi, now that it controls the mine’s owner, Ivanhoe.
  • Speaking of aluminum, Rusal (posting the worst return over the last year at -55.7%) is having trouble getting rid of its 25 percent stake in Norilsk Nickel (-26.1%). (Norilsk, by the way, sees average nickel prices around $20,000 per ton in 2012.) Rusal still has a big debt burden, but the company “reduced cash costs to $1,950 per tonne by the end of last year…and with prices hovering near $2,200, it is accumulating cash,” said Rusal’s Head of Equity and Corporate Development Oleg Mukhamedshin. Glencore owns a minority stake in Rusal, and will continue to sell Rusal’s aluminum exports. As Mukhamedshin characterized it, “we are good partners for the long term.”
  • Glencore, for its part, obviously made the biggest M&A news splash in commodity markets with its renewed takeover bid of Xstrata. That means other mining companies could surely follow in their M&A footsteps. “The market is reasonably conducive to M&A, other large strategic deals could provoke people to think about their own destiny,” said David Hammond, global head of metals and mining at Morgan Stanley. Another banker, Tom Massey (Citigroup’s head of metals and mining for Europe, Middle East and Africa), said, “Delaying corporate activity is not an option for some, as the best assets are getting more expensive because a lot of them have already been consumed.”
  • And speaking of consuming, China of course figures into the whole picture as well. Vale (-7.7% total return) hopes to unload its new, huge Valemax vessels in China very soon, to ship greater quantities of iron ore to China faster. Tito Martins, Vale’s chief financial officer, predicted that in the next decade, China’s economy will expand by $4 trillion, even if growth slows by more than a third. He also told Reuters “iron ore prices are likely to remain above $120 a tonne in the next several years…because demand remains strong and at prices below that, Chinese producers of low-quality ore begin to lose money.”

 Image Source: Reuters

Following the sudden exit of Rusal’s chairman, billionaire Viktor Vekselberg, happenings on the aluminum market front are grabbing our attention. Rusal is in “deep crisis caused by the actions of management” (in Veskelberg’s words quoted by Reuters) as far as the company’s debt level is concerned; its current stock price is now around 43 percent of its IPO price. The graph below shows Rusal’s stock price benchmarked against LME aluminum prices:

Source: Reuters

 

Other aluminum producers are also in trouble, not because of internal strife, but because of external market elements. Bloomberg reported that the National Aluminum Company of India (NALCO), India’s third-largest aluminum producer, is struggling with lower aluminum prices caused by slumping Chinese demand.

According to Bloomberg, exchange prices have not held high enough to exceed Nalco’s price of production, which currently stands at anything higher than $2,300 per ton, making aluminum production uneconomical — therefore forcing the company to keep 10 percent of its production capacity closed. (LME aluminum has dropped 19 percent since May, falling from a six-month high of $2,353 a ton on March 1 to around $2,260 per ton currently.)

Nalco closed capacity for two main reasons. First, China’s demand for key industrial metals has been lagging, as Beijing cut back GDP growth targets and focuses more on consumer spending rather than capital investment and construction. Second, Nalco doesn’t have its own secure coal supply — if it did, it may be able to keep producing aluminum profitably. The company would have to import its coal, and at current prices, many agree that’s just not feasible.

However, the pricing slump hitting aluminum may, in the short-term, be kept in check by another, familiar issue. Aluminum warehousing is again in the news — namely, fears that necessary metal inventory could be stuck for months in warehouses owned by the likes of Glencore and Goldman Sachs. This time, however, the Detroit warehouses are not the primary concern — that award goes to the Dutch port of Vlissingen and in the Malaysian port of Johor.

Even still, Reuters reports that “taking Vlissingen, Johor and Detroit out of the system, there’s almost no ‘free-float’ or available aluminum, because the rest of the 3.5-million tons is largely tied up in financing deals,” according to an analyst. Ultimately, the warehousing tie-ups are rendering inventory, as a guide to the fundamentals of demand/supply, rather useless as a way to gauge aluminum consumption.

Overall, China’s demand situation will still be the key driver for medium to long-term aluminum pricing. Prices now seem to be set for testing support around $2,200-2,150 per metric ton, but HARBOR Aluminum predicts prices will still inch up during Q2 and end up at $2,600 per ton by year-end.

Time is running out — only 4 days left to register for Commodity EDGE! Click below:

The resignation of billionaire Rusal chairman Viktor Vekselberg this week underlines the fragility of Russian corporations often run by individuals with egos to match their bank balances.

It is not inconceivable that similar circumstances could not arise in the US, but it is a lot less likely where CEOs and major shareholders are constrained by a more professional corporate culture and main boards with the teeth to reign in egotistical CEOs or Chairmen (let’s not be too complacent, though — Lehman and Enron weren’t that long ago).

Not that we are suggesting Mr. Vekselberg’s decision was due to ego. In his announcement, reported Reuters, he cited problems with major shareholders saying he had disagreed with a number of decisions related to Rusal’s strategic development and modernization of production and human resources policies.

The real beef, though, seems to be the refusal of Oleg Deripaska, chief executive and largest shareholder, to sell a stake he took in fellow Russian mining giant Norilsk Nickel. Deripaska bought some 25 percent of Norilsk just before the financial crisis and saddled Rusal with massive debts — now said to stand at $10.91 billion as of September’s end.

Deripaska hoped to build a globally significant metals group (Rusal is No. 2 only to Alcoa in aluminum, and Norilsk is the largest producer of both nickel and palladium), but was unable to agree to terms with Norilsk’s main shareholder Vladimir Potanin. Potanin is reported in Mineweb to have offered to buy back the shares Rusal owns in Norilisk at a premium to the current price, but Deripaska will not sell, a refusal that appears to be a large part of the chairman’s gripe.

Rusal made a $432 million profit for the three months to the end of September on annual revenues of nearly $11 billion – more or less the same as the firm’s debt. Vekselberg may be genuinely worried about the firm — BOC International said in a research note in January that he’s reported as saying, “Rusal could fail to meet debt covenants in 2012 if the current aluminum price weakness persists. We estimate that for Rusal to avoid breaking debt covenants, the aluminum spot needs to stay above US$2,400/t in 2012.”

Vekselberg is a major shareholder, holding 15.8 percent of Rusal either directly or indirectly; he is also said to be worth some $12.4 billion in his own right, ranked as Russia’s eighth-richest man.

The fate of large swaths of Russia’s corporations is held in the hands of very few individuals who have made their money through political affiliations since the 1990s. What’s surprising is not that such individuals sometimes fail to agree on how to manage the vast corporations they have amassed – so much power and wealth amassed so quickly would probably go to anyone’s head! – but that foreign investors are willing to risk their money buying shares in such enterprises.

Rusal’s shares were suspended after falling 1.3 percent on Tuesday, and they now stand 43 percent below the level at which the company floated in Hong Kong in early 2010, when aluminum averaged some $100 per ton below where it is now.

Alcoa (and the rest of the world) have been waiting for the Chinese to curtail aluminum smelter capacity in the face of weak prices and the high cost of power and raw materials, but the Chinese continue to confound expectations and, as a recent Reuters report underlines, continue to add new capacity.

“2012’s output (in China) would rise at least 10.5% from 2011,” Li Dongguang, president of the Chinalco trading unit of Aluminum Corp. of China, is reported as saying. Global output, including China’s, would rise 7 percent to 48.8 million tons in 2012 from 2011 as capacity in China, the Middle East and India rises — even if some plants that rely on expensive energy supply may cut production, should world aluminum prices fall.

Meanwhile, demand is expected to rise by only 6.6 percent in China, below the rate of GDP growth and below the rate at which new capacity is coming on stream. Western producers such as Alcoa, Norsk Hydro and BHP Billiton, all of whom have idled or permanently closed smelter capacity, have been joined, at least in spirit, by Rusal, that said this month that it expects to idle 6 percent of its capacity within 18 months.

To set such a long time frame to potential closures suggests the Russian aluminum producer is trying to create a sense of impending shortage rather than flag firm plans to close any capacity. Indeed, Rusal’s production increased marginally last year to 4.12 million tons, even as some sales were shunted in 2012 close to year’s end.

Source: HSBC Research

Everyone appears to be pointing at everyone else saying they are likely to cut production, with only those producers facing long-term cost pressures finally giving up the fight and closing capacity. Local or provincial governments keen maintain revenues and employment are no doubt supporting Chinese producers.

Although some capacity was said to have been idled temporarily in January due to cost pressures, as up to a third of producers are said to be losing money at current prices. They may be holding on for price increases expected by both Chinalco and Rusal in the second half, although both are predicated in part on the assumption that someone, somewhere will idle production.

Knowing the Chinese, though, any rise in price will be accompanied by the re-starting of idled capacity.

January is traditionally a time when we look forward to the future.

Maybe we make our New Year’s resolutions to eat less, exercise more and be a nicer person — well, the first two anyway. It is also a time when we in the metals media often look forward and try to discern what the year — or even years — ahead may hold.

So drawing on a thought-provoking report by HSBC entitled “The World in 2050,” we thought it may be fun — interesting even — to muse on what the run-up to the middle of this century may hold.

This is more than just an academic exercise; for many corporations, long-term forecasting, while prone to numerous caveats, is an integral part of long-term strategic planning for businesses.

Long-term demographic changes, for example, can have a profound impact on marketing, revealing growth opportunities in what may appear relative backwaters today. Likewise, political and demographic changes can have a profound impact on an issue close to our hearts – security of material supply.

Let’s Talk Boys and Girls

The first section we’ll discuss is demographic changes because these are probably the most accurate to forecast, based as they are on current population sizes, cultural/religious attitudes towards birth control and relative levels of prosperity.

From an economic development point of view, population profile is as (if not more) important than population size. The proportion of working-age people in mature economies like Europe, Japan and China will fall relative to the overall size of the population by 2050. Meanwhile, the bank believes the population of many African countries will double by 2050.

Nigeria, for example, will have almost as many people as the US, and Ethiopia will have twice as many as Germany. Pakistan will have the sixth largest population in the world; even though it and many African countries remain relatively poor, they still represent massive sales opportunities for products and services currently doing well in highly populated poor countries like India.

By contrast, the Japanese working population looks set to contract by 37 percent, underlining the severity of risks to their debt and health care systems repeatedly raised in the business press. Other mature economies are facing the same challenge: the eurozone faces similar problems with working population declines of 29 percent in Germany, 24 percent in Portugal, 23 percent in Italy and 11 percent in Spain.

How will sovereign debts be paid off by a shrinking working age population? Even today’s emerging markets face the same issue. Russia’s working age population is set to contract by 31 percent by 2050. A provocative graphic by China Profile projects that 31 percent of all Chinese will be above age 60 in the year 2050, compared with less than 15 percent today. Not only that, but a steadily falling percentage of a steadily falling population will mean many fewer workers will be available in future decades to deliver the growth in prosperity the country needs as its population ages.

While population growth is not the sole driver of national GDP growth, it is a very significant contributor; an exception, though, is clearly China with a contracting total population yet rising productive population as agricultural workers move into the factories.

The next part of this short series looks at which countries are expected to be the chief beneficiaries of population growth, and which factors will drive substantial increases in national wealth.

–Stuart Burns

1 4 5 6 7 8