Is Down The Only Way For Gold Prices To Go in The Foreseeable Future?

[caption id="attachment_82532" align="aligncenter" width="500"] Gold prices since 2013. Source:MetalMiner analysis of @stockcharts.com data.[/caption]

Gold is the only commodity wherein physical annual demand is only a tiny fraction of total supply available and shortages of gold caused by physical demand never happen.

Therefore, China's demand growth for metals or the potential boost in U.S. infrastructure spending are factors that aren't really helping push gold prices higher unlike industrial commodities.

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What's causing gold prices fall dramatically? The U.S. dollar.

[caption id="attachment_82533" align="aligncenter" width="500"] Gold (in dark) vs the dollar index (in green). Source: MetalMiner analysis of @stockcharts.com.[/caption]

Since mid-August the dollar started a bull run that is still in play. Three main factors are propelling the dollar's bull run:

Markets expected the Federal Reserve to raise rates by the end of the year. In December the Fed raised interest rates by a quarter point, as expected, but policymakers signaled a likelihood of three increases in 2017, up from prior expectations for two moves. While interest rates outside the U.S. stay near zero or even in negative territory, it's no wonder yield-seeking investors are going after the greenback.

The ongoing political tensions in Europe are causing the dollar to appreciate against the euro. The ongoing refugee crisis in Europe, Brexit, terrorist attacks and political instability are some of the events causing investors to lose their appetite for the European currency this year.

Finally, the victory of Donald Trump has added fuel to the dollar's bull market. The new president-elect has proposed new tax policies that will potentially make multinational companies bring their foreign profits back to U.S., increasing the demand for dollars. In addition, the dollar is perceived as a stronger currency since investors expect growth in US to get a boost.

What This Means For Metal Buyers

As long as the dollar continues to rise, there is little hope for gold investors to make returns. Gold buyers should wait closely for weakness in the dollar before buying gold. For now, sentiment on the dollar continues to be quite bullish.

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Lithium Supply: A Battery and Electric Car Feast or Famine?

About a year ago I was interviewed by a columnist from a leading economic newspaper about the prospects for the lithium market.

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The gist of the article was the question of will lithium demand from electric vehicles unsustainably drive up prices due to supply shortages? I said no. I expected the market to rise as demand increased, but that there was no shortage of lithium in the world and supply would rise in response to price increases and demand.

Well, the paper went on to report that supply shortages would constrain the market and the lithium price was set to boom. That’s okay. I don’t expect everyone to take my advice as gospel and, to some extent, you could say the author was right, the price has risen as this graph from CRU illustrates.

[caption id="attachment_82526" align="alignnone" width="300"] Source: CRU Group[/caption]

But the same CRU article goes on to explain that to every price rise there is a response. The extent to which the market responds with new capacity or expansion to existing capacities varies with the commodity, the market during the time frame involved and any number of other issues. We will come back to CRU’s modelling of the lithium market a little later but, for now, how has the lithium industry responded to this rise in demand and what effect has the rising price had?

Lithium Investing

Well, Reuters leads an article with “stampede to invest in lithium mines threatens price gains” and goes on, as the title suggests, to say a rush to invest in new and expanded mines for lithium means material will flood the market just as demand for lithium batteries is due to soar, curbing prices.

The article reports the market is on course for a global surplus next year or 2018 as miners gear up to expand output — overwhelming demand increases from electric cars. Rechargeable batteries such as those used in electronics and electric vehicles accounted for 37% of global lithium demand last year, consuming 66,000 metric tons of lithium carbonate equivalent (LCE), but automotive battery demand is the sector expanding the fastest by a large margin. According to Macquarie Bank, the share of lithium demand from electric and hybrid vehicles is due to surge from 10% in 2015 to 33% by 2021.

The lithium market was caught in deficit in 2014 causing the start of the rise in prices we have seen in the last couple of years. But, as a result, funds are being raised at an unprecedented rate to invest in new mines. Back to Reuters' world, lithium reserves are 14 million metric tons, quoting the U.S. Geological Survey, and about half of these reserves are being developed into projects.

What's the Market Really Look Like?

The industry is acutely aware of the dangers, one of the market leaders, Albemarle, is quoted by the FT as saying the company has capacity to produce around 165,000 mt of lithium annually by 2021. But the global lithium market is currently around 185,000 mt per year, and Albemarle is only one of five majors. Nor are they particularly bullish about the rate of electric car pick up, a rate of growth that has been consistently overestimated in recent years. The company predicts plug-ins and electric vehicles will make up just 2% of annual sales by 2021, up from 1% currently.

Reuters cites numerous new mine expansion plans led by Albemarle who announced early this year plans to more than double its output in Chile while rival FMC Corp. said in July it wanted to triple annual output to 30,000 mt over the next several years. The biggest surge is likely to come from a rash of junior miners ramping up production at their new mines.

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As a result, the global market balance is expected to tip into surplus next year according to Macquarie and CRU. "Depending on the number of projects that eventually come on stream and the ramp up that they can achieve, a market surplus may emerge that could be as large as a 30% excess above total consumption levels by 2020," CRU's Alex Laugharne is quoted as saying.

What Will Happen to Demand?

Back to that earlier CRU report, the firm put together three scenarios based on uptake of electric vehicles and the ramp up of new mine supply. In all models the price is set to fall, in the most optimistic for lithium investors it will peak early in the decade and fall from 2025, but in both the median and lower estimates the price falls from next year... sharply.

We have seen this so many times in the commodity industry we should not be surprised, a natural bias is to believe the current trend will continue but it often doesn’t. Over investment leads to excess supply and a price collapse, that may be good news for battery and electric car manufacturers, but it should be a note of caution for investors in junior miners and new lithium investment funds.

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Best of 2016: George Soros Says Next Financial Crisis Already Started

Over the holidays, we will be republishing our top posts of 2016 over the next few days. This was our single most-read post of 2016 from way back in January. Many of Soros' predictions for the year we're about to leave behind never came to fruition (a "hard landing" in China) while others were spot on (the Federal Reserve left interest rates, mostly, alone this year). Looking back on it now, much of what Soros spoke of has not changed. China is still exporting deflation even though metal prices recovered this year.

You would be a brave investor to bet against George Soros. The billionaire investor has shown a canny knack of making the right calls over the decades. As an article in Bloomberg says he rose to fame as the hedge fund manager who broke the Bank of England in 1992, netting $1 billion with a bet that the UK would be forced to devalue the pound.

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He also successfully bet that Germany’s deutsche mark would rise after the collapse of the Berlin Wall in 1989 and that Japanese stocks would start to fall in the same year. Between 1969 and 2011, Soros led his hedge fund to average annual gains of about 20% before returning money back to investors in 2011.

Expecting a Hard Landing?

In an interview with Bloomberg’s Francine Lacqua from the World Economic Forum in Davos, Switzerland, this week, he is predicting another financial crisis like 2008, but rather than being precipitated by the US sub-prime market, this one will be down to China exporting deflation to the rest of the world.

Ironically, Soros believes China has the reserves and centralized control to weather what he sees as an inevitable hard landing. It is the effect that China’s hard landing will have on the rest of the world that worries him.

When asked if he expected a hard landing he responded, "I’m not expecting it, I’m observing it.”

It has already started. Soros says a more accurate measure of China’s current economic growth is 3.5%, rather than the latest official figures of 6.8% expansion in the fourth quarter. He added that the country’s unsustainable debt burden and capital flight are both signals of a hard landing.

China had about $843 billion of capital outflows in the 11 months through November, according to a Bloomberg Intelligence estimate. Meanwhile, China’s slowdown is combining with lower oil prices and competitive currency devaluations to increase the risk of deflation around the world, a situation the world has no experience of handling and few tools left to counter.

Don't Expect Interest Rates to Rise

Soros says the Fed will not raise rates this year, and, indeed, made a mistake in raising them late last year as deflationary pressures were already rising. He predicts a continuing difficult year for stocks, commodities and Asian currencies, and says the market has not yet hit bottom.

Soros is not alone in his predictions, other hedge fund managers at Davos have made similar warnings and a report in the New York Times this week says deflationary pressures are dissuading consumers from spending the gains made by lower gasoline prices on increased spending elsewhere. The paper quotes JPMorgan Chase & Co. which said lower prices will help expand economic activity by just 0.1%, while economists at Goldman Sachs said they expected an impact “around zero.”

In a deflationary environment, lower prices actually encourage consumers to step back from purchases in the belief that consumption tomorrow will be cheaper than today. The last time we had such conditions was in the 1930’s when major economies went backwards and now, as then, we would find it a challenge to overcome.

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Emerging Market Currencies and Debt Face a Volatile Future

It has probably never been as hard to read the runes for the fortunes of emerging market (EM) economies as it is now.

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If currencies are any barometer for the health of an economy, or at least for investor’s perceptions of the health of an economy, this year has seen considerable variations and fluctuations. Robust commodity prices appear to signal continued strong health and confidence in China, even as the government works hard to realign the economy from export-led manufacturing to consumer-led domestic growth, but the currency has been falling since the spring as this chart shows.

[caption id="attachment_82504" align="alignnone" width="300"] Source: Financial Times[/caption]

EM investors started the year hiding over fears about China and the oil market, then recovered during mid-year as growth remained stable and commodities rose.

Then, a shock Donald Trump election victory sent expectations of early and multiple Federal Reserve interest rate increases into the news. As the FT notes, we now have fears over the status of trade with China and the threat of it being labelled a currency manipulator casting a pall over U.S.-Sino relations in the year ahead.

A Pause in Emerging?

As a group, EM currencies have not fared well of late. A few commodity currencies like the Russian ruble, the Brazilian real and the South African rand have made gains, but the in addition to the Chinese renminbi, the Turkish lira, the Argentinian and Mexico pesos have fared poorly, dropping double digits.

[caption id="attachment_82503" align="alignnone" width="300"] Source: Financial Times[/caption]

The FT reports there has been a heavy outflow of funds from emerging market bonds, raising borrowing costs and putting pressure on the countries that borrow most heavily in U.S. dollars.

According to the newspaper, investors pulled $1.2 billion from emerging market bond funds last week, marking the sixth consecutive week of outflows. China can cope with this sudden reversal of fortunes but the article reports Bank of America Merrill Lynch Global Research, saying a new “fragile three” has emerged this year, with Brazil, Turkey and South Africa more reliant on foreign investment and so most at risk should EM fall out of favor in 2017.

Emerging Outlook

Brazil has improved its current account deficit, but both South Africa and Turkey are still struggling, with political upheaval not helping investor sentiment. The biggest worry, though, is Venezuela, which heads an index put together by Standard Chartered of countries most likely to succumb to a debt crisis. It is a list that also features Jordan, Argentina and, not surprisingly, Greece.

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Across EM as a whole though, the FT reports economic growth is projected at 4.7%, led by India and China, while Latin America will rebound with 1.5% growth. As such, some see EM debt as a higher risk but high-yield and attractive investment, but much will depend on the pace of Federal Reserver rate rises and, therefore, the cost of borrowing for these countries. In a follow-up, piece we will be looking specifically at China’s debt and the challenges facing China’s poorly regulated bond market.

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Smaller Iron Ore Miners Still Can’t Re-Open at Current Prices

While this year's spectacular rebound in iron ore prices has been a godsend for the world's biggest miners, it has not gone high enough for smaller, less-efficient producers that still have pits shuttered and equipment idle.

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The price of the steelmaking material has nearly doubled in 2016 to above $80 a metric ton, a boon for miners such as Vale, BHP Billiton and Rio Tinto which extract the material at a cost of less than $20 per mt.

ABI Limps Out of 2016

Coming off a modest increase after two consecutive months of contraction, the Architecture Billings Index recorded another small increase in demand for design services. As an economic indicator of construction activity, the ABI reflects an approximate nine to 12 month lead time between architecture billings and construction spending.

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The American Institute of Architects (AIA) reported the November ABI score was 50.6, essentially unchanged from the mark of 50.8 in the previous month. This score reflects a slight increase in design services (any score above 50 indicates an increase in billings).

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Chinese Commodity Prices Pushed Higher By Robust Imports, Speculation

In recent weeks the Dalian and Zhengzhou commodity exchanges and the Shanghai Futures Exchange have all toughened trading requirements several times.

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The measures imposed include raising trading margins, hiking transaction fees and imposing trading limits in attempt to tamp down speculative trading. Reuters' Clyde Russell referred to the situation as China having "thrown the world's commodity producers and traders a massive party."

[caption id="attachment_81921" align="aligncenter" width="500"] HRC and CRC prices in China rising through November. Source: MetalMinerIndX.[/caption]

This year saw most analysts surprised by the strength of both China's coal and iron ore imports, which led to rallies in the prices of both commodities. Chinese imports of iron ore jumped to the third-highest on record in November with 91.98 million metric tons up 13.8% from the previous month, taking the year-to-date gain to 9.2% compared with the same period in 2015, according to Reuters.

The coal import picture was even more robust in November. Coal imports of 26.97 mmt were the most in 18 months, and were more than double the imports recorded in November last year, according to preliminary Chinese customs data reported by Reuters. Coal imports have risen 22.7% in the first 11 months of 2016.

Steel Output... What Cuts?

Prices are increasing on the exchanges as many analysts didn't really believe that China would cut its domestic coal output, but did believe that it would close excess steel capacity as it has repeatedly promised ... and promised some more. Capacity is down, but actual production? Those cuts haven't really materialized, either.

China seems to have made an effort to cut back on the excess steel exports but — as often happens with commodities — trying to curtail production didn't have the desired effect. Before November, China's coal output was down 10% year-on-year, and steel capacity was cut by close to the government target. This did not lead to a corresponding drop in steel production, which was up 1.1% in the first 11 months of the year. The remaining steelmakers simply picked up production.

A similar thing happened with coal. Authorities in Beijing have made their desire for increased domestic coal output cuts clear, but the miners have struggled to deliver on said output cuts because they, reasonably, are making more money off of the high prices.

Global Impact

China is the world's largest consumer of commodities and the increases felt in the People's Republic are felt globally in the supply chains of most products Americans and other nations' citizens consume.

One longtime, U.S.-based sourcing professional who works with suppliers in China told MetalMiner that his company is seeing prices for raw materials it sources from there up 70% for zinc, its Chinese steel prices up 60%, packaging costs up 50% and plastic resins such as polypropylene up 30% this year.

Some of those increases have to do with rising oil prices and the November Chinese imports surge is seemingly hiking prices across the board. Imports of crude oil to China recovered strongly in November to 32.35 mmt, according to Reuters, the equivalent to about 7.87 million barrels per day, which is above the year-to-date average of 7.53 million bpd.

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Crude oil imports to China are about 14% higher so far this year, which represents an increase of around 925,000 bpd. Chinese imports of copper also surged, rising 31% to 380,000 mt in November from the previous month, the highest since June and a recovery from October's near two-year low.

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China’s Bond Markets Aren’t a One-Way Bet Anymore

Many economists and market observers have been warning for some time that with cheap cash sloshing through the Chinese economy, and attractive investments in the real economy remaining scarce, investors had plowed too much money into China’s bond market.

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The Financial Times reports China’s 10-year government bond yield fell from 4.6% in January 2014 to 2.65% by late October. Banks borrow overnight and buy longer dated bonds in what appears a clear carry trade but, to work, the market requires stable and low market rates.

With the Peoples Bank of China (PBoC) trying to raise short term rates and ease long term rates, it has been trying to squeeze speculators out of the market while maintaining liquidity for long term industry and commercial borrowers. However, like all bonds worldwide, China’s are under pressure from the U.S. Federal Reserve’s plans for faster interest-rate increases next year.

The Wall Street Journal suggests China may guide its own rates higher to prevent the Chinese currency from weakening faster against the dollar, a trend that would further squeeze Chinese borrowers in need of cheap finance. China’s total debt surged to around $27 trillion this year, or 260% of gross domestic product, compared with 154% in 2008 at the start of a stimulus program to offset the nation's financial crisis. It is continuing to grow at more than twice the pace of economic growth with a considerable sum of new investment going into unproductive areas like shoring up bankrupt companies or adding further unproductive production capacity.

Bad Debts? Fueling More Debt?

As much as 15% of the value of bank loans to Chinese companies may go unpaid, the WSJ reports citing researchers at the International Monetary Fund. Even riskier, the newspaper suggests is an estimated $8.5 trillion in off-balance sheet “shadow” finance issued by a matrix of banks and lightly regulated institutions.

It is unclear how much of China’s bond market is owned outright, and how much was bought with money borrowed under China’s shadow finance market, raising risks. Analysts estimate of the level of leverage in the system overall is wide, simply because no one knows, estimates say it could be between one-point-two- and five-times the value of the assets, still a relatively low figure, although in pockets of the market it can go much higher and therefore leaves open the possibility of failures in certain industries or areas of market activity.

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One of the biggest signs of domestic confidence in the system and the currency is outflows of capital this year. China’s currency, has fallen to its lowest level against the U.S. dollar since 2008 as more Chinese move their wealth out of the country despite strict capital controls. As the exchange rate falls overseas or dollar denominated borrowings become harder to service if the Fed rises push up the dollar next year. Nationally the PBoC has the firepower to handle this, but individual companies may not have such reserves. All in all, China’s bond market is likely in for a rocky ride next year, giving Beijing yet more things to focus on in an increasingly uncertain global economic and political landscape.

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Have Bulk Commodities Peaked? Iron Ore Prices Make it Seem That Way

It seems like a bizarre question when iron ore has been on a bull run this year and coking coal producer Glencore has just agreed first-quarter contract prices with Nippon Steel that are the highest since 2011.

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But Morgan Stanley, in its 2017 Outlook, takes a bullish stance on base metals but forecasts bulk commodities such as iron ore and coking coal will do no more than tread water next year. Trying to call a peak in any market is, at best, a stab in the dark, but coking coal spot prices appeared to be easing just as contract prices set a new near-term record.

According to Reuters, miners working under the contract system have been receiving $200 per metric for their coal since October 1, and they were receiving just $81 per mt under the contract price as recently as the first quarter of 2016. For the period between January 1 and March 31 2017, Glencore and Nippon Steel have agreed that premium hard coking coal sold under the contract will be priced at $285 per mt.

Coking Coal Prices

The price agreed by Glencore and Nippon Steel was being adopted by rival miners, the article stated, quoting an analyst who said "Importantly, the new quarterly contract is being followed by other producers, including overnight by Canadian producer Teck Resources."

However, the spot price for hard coking coal reached $308.80 per mt in November and it appears to have peaked at that height, slipping in recent days to be $274.40 per mt last week.

Spot Iron ore prices have also eased back recently from over $83 per mt to below $80, although whether this is the early stages of a reversal is too early to call. It is likely the price was driven higher by strong demand in the robust Summer and Fall months but may be easing now that the quieter winter construction period begins to bite. Back to Morgan Stanley, the bank is predicting an average price of just $58 per mt for iron ore next year as oversupply fundamentals reassert themselves.

Yet steel production, and therefore raw material demand, has remained robust in recent months. Reuters reports that China's steel mills boosted their monthly output at the fastest pace in more than two years in November, putting the trend down to robust infrastructure demand. Even as higher iron ore and coking coal prices hit margins, a robust market enabled mills to raise prices and remain profitable. Output rose 5% to 66.29 million mt year-on- year, the fastest growth since June 2014, according to data from the National Bureau of Statistics.

Who Will Blink?

So what will give first? Is the drop in spot prices a sign that steel production is already easing, or will continued above-trend steel production reverse those spot price declines for iron ore and coking coal? For now, it could be a mismatch in timing, and our bet is, at least in the first half of next year, steel production will pick up again and with it spot raw material prices. Where it goes after that depends much on the availability of credit and continued infrastructure investment in China.

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A slowdown is in the cards — every previous stimulus supported rise in activity has been followed by a slow down as retail property development overheats or the infrastructure funds are used up. But will president-elect Donald Trump’s plans then take over boosting demand in the U.S.? Probably not before 2018, so H2 2017 could indeed see a decline in raw material prices. We shall see.

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How To Buy Industrial Metals In a Bull Market: Price Pull Backs

Scenario: Within the next two months you need to go to your supplier and buy metal. Let's say you are thinking about placing an order that will meet your metal needs for the next six months. Let's say you correctly identify that you are in a bull market (you read us).

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Therefore, as you expect prices to keep moving up, you quickly grab the phone and call your supplier to place the order ASAP.

Is that the right way to do it? Nope.

I say this over and over, but I don't get tired of saying it: The key to being consistently ahead of your competitors (and beat the market) is not about predicting, but about finding the right time to buy. Markets are unpredictable and you can always get it wrong. The key to consistently lowering your purchasing costs is to buy at an attractive price, one in which the metal has high probability to make a move higher.

In a previous post (part one of this article), we talked about one of the situations we like to use to hedge/buy forward, price consolidations. Today we'll show another good circumstance to time your purchases during a bull run:

Price Pull-Backs

In a bull market, sometimes prices rally and it's risky to buy at those levels because prices could pull back simply due to profit taking. A good opportunity to time your purchase is when prices correct or pull back and then momentum picks up again. That signals that buyers are again back in control and prices are likely to move higher.

[caption id="attachment_82421" align="aligncenter" width="500"] Tin offered two good opportunities to time purchases after prices pullbacks this year. Source:MetalMiner analysis of Fastmarkets.com data.[/caption]

We've seen examples of price pullbacks in pretty much across all industrial metals this year. A good example is tin.

After calling bull market back in April, buyers could have bought tin after a price pull back in May and recently after another pull back in November. It's important to identify those areas where we expect to see support, which we indicate in our monthly outlooks. Buyers had another great opportunity to buy tin back in July after a price consolidation.

[caption id="attachment_82423" align="aligncenter" width="500"] Subscribers bought cold rolled coil steel in November after a price pullback. Source: MetalMiner IndX.[/caption]

A more recent example is steel. We called bull market in steel back in April, when buyers had a great opportunity to buy forward (we recommended buying one year's worth of demand). But then, in the summer prices signaled a top, we recommended subscribers to hold on purchases, and wait for a price pull back to buy again.

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Prices then corrected over the next few months. During price pull backs is important to wait until momentum picks upwards again. That happened during the third week of November, when we sent our subscribers a note recommending to buy steel forward. Another textbook price pullback during a bull market.

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Why You Can Be Bullish On The US Dollar and Commodities

Many of our readers are wondering what's going on with the U.S. dollar and industrial metals.

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The dollar and commodities tend to move in opposite directions. Why, then, is the dollar trading at a 14-year high at the same time as industrial metals are on a tear? For how long can these two continue to move together? Who is the real bull and which one is just imitating?

[caption id="attachment_82366" align="aligncenter" width="500"] The industrial metals ETF in black vs. the U.S. dollar index in green. Source: @StockCharts.com.[/caption]

To answer these questions we need to look at history. The dollar and industrial metals have risen in tandem since September. Even oil prices are making multiyear highs. But this is not such a strange development.

The US Dollar and Commodities

The dollar-commodities relationship has not been without its temporary periods of decoupling. Over the past two decades there were two major periods in which the dollar and commodities moved up together for a whole year. The last time this happened was in 2005 and the causes were rather similar to what we are seeing now.

[caption id="attachment_82367" align="aligncenter" width="500"] The U.S. dollar index (in green) vs commodities (in blue). Source: @StockCharts.com.[/caption]

Has This Happened Before?

Back in 2005, industrial metals were on a tear thanks to China's increasing appetite for commodities. Today, the main factor driving commodities up is higher-than-expected demand growth, especially from China, while lower than expected supply.

That would normally bring the dollar down, but in 2005 there were a series of factors that made the greenback rise, even in the face of a rising commodity market.

First, the dollar's role in the temporary break in the dollar-commodity inverse relationship in 2005 was owed to a two-year push of U.S interest rate increases (from June 2004 to June 2006) which lifted U.S short-term interest rates above those in the Eurozone. Currently, the dollar is getting a boost as the Federal Reserve is expected to increase rates while interest rates in Europe are in negative territory.

Another driver of a rising dollar, back in 2005, was a blow to confidence in the European Union and its currency dealt by France's rejection of a proposed European Union Constitution. Similarly, events like Brexit, a referendum in Italy or the upcoming presidential elections in France are adding tensions about stability in Europe and contributing to an appreciation of the dollar against the Euro.

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Finally, also contributing to the dollar's surge in 2005 was a temporary tax break granted by the Bush administration to U.S. multinational corporations, allowing them to repatriate profits from their overseas subsidiaries. This prompted a surge of inflows into U.S. dollars from euros and, unsurprisingly, the dollar rose against the euro. A very similar case is what new president-elect Donald Trump has proposed: Lowering the corporate income tax rate from 35% to 15% while allowing repatriation of corporate profits held offshore at a one-time tax rate of 10%. These policies, if implemented, will create more demand for dollars so it's no wonder that investors have already been betting on the dollar since the election's outcome.

What This Means For Metal Buyers

By looking back in history we can relate the current macro factors driving dollar and commodities higher to what happened back in 2005. The dollar-commodity inverse relationship is a strong one but there are periods where they can decouple for some time. This means that there is no reason to be bearish on commodities because the dollar is moving higher and vice versa. These two markets could continue to trend higher in 2017. We will continue to watch them closely to determine which one breaks first but, until then, I'm temporarily bullish on both the dollar and commodities.

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Palladium Price Powers to 18-Month MMI High

MetalMiner's Global Precious Metals MMI dropped two points this month to 79, from 81 in November; a 2.5% decrease. But that's less the story than what happened within this precious metals sub-index.

The PGM Story

As we said last month, longer-term structural concerns remain for the platinum-group metals (PGMs), especially platinum and palladium. However, in the short term, one of those two precious metals that are instrumental in automotive catalytic converters kept the Global Precious MMI from falling even further for December.

Indeed, with gold and silver falling across all four geographic markets (see below), our U.S palladium bar price jumped to an 18-month high, rising a whopping 24% month-over-month. Japanese palladium also rose appreciably.

The platinum bar price, however, did the reverse. Our U.S. platinum bar price hit a 10-month low, dropping 7% since Nov. 1.

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Crossing like ships in the night, one heading north, one heading south, what should buyers make of the platinum/palladium divergence?

According to HSBC senior analyst James Steel, talking to Platts, "the platinum-palladium spread has narrowed substantially, from $375/ounce before the U.S. election. This reflects clearly tighter underlying fundamentals for palladium."

With car sales in the U.S. and China continuing to be robust, and with Johnson Matthey predicting another supply deficit in 2017, palladium could continue its buoyancy for the near future.

The Dollar –> Infrastructure –> Gold

Raul de Frutos gave MetalMiner readers this helpful rundown in late November:

A rising dollar depresses commodity prices, especially precious metals. It does have less of an effect on more economically-sensitive groups like energy and industrial metals. Indeed, industrial metals are on the rise despite a strong dollar. This is because the dollar is rising on expectations of higher rates down the road but, at the same time, metal prices are getting an additional boost because of Trump’s plans to spend big on the nation’s infrastructure. However, gold's demand won't be affected by infrastructure spending. As a result, investors are left without reasons to buy gold at this moment.

That still appears to be the case here in early December, as the US gold price on our MetalMiner IndX hit its lowest point in 10 months, falling to $1,173/oz on Dec. 1 — just over an 8% drop from Nov. 1.

(Silver prices followed suit across 4 markets globally, all dropping from November to December.)

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Week-in-Review: Don’t Get Trampled By This Bull Market

Zinc, lead and tin all hit multiyear highs this week and the Organization of Petroleum Exporting Countries finally agreed on a production — with its own members and Russia — to cut back production so oil prices are up, too.

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We were already in a metals and commodities bull market before the beginning of the week but it's now more like a bull stampede. They're even running in India. Lead Forecasting Analyst Raul de Frutos notes that this bull market is particularly unusual because it coincides with a strong U.S. dollar. Since commodities are valued in dollars it's odd that they're both up — and rising — at the same time.

 

 

MetalMiner co-founder and editor-at-large Stuart Burns also chimed in with vexing information, noting that tin is up while there seems to be abundant to robust supply of the stuff in the Earth's crust with stable nations and reliable companies set to mine it.

[caption id="attachment_82202" align="aligncenter" width="550"] Don't get stuck under these guys in the rush to get into this market. Source: Adobe Stock/Kyrien.[/caption]

So, supply and demand aren't fueling tin's rise and that's likely true for other metals as well. "New money," as they say, is flowing into metal markets as investors are excited about Chinese construction demand and the prospect of a still nebulous $1 trillion infrastructure plan here in the U.S. China is, once again, driving the demand boat as the U.S. consumes only about 8% of commodities worldwide and the People's Republic consumes the most.

So, metal bulls are driving the price surge truck more than following it. The dollar and commodities will have to part ways at some point, but which one will fall? And when? We'll let you know as soon as any credible signs form.

More Countries Hit With Steel Plate Duties

Meanwhile, more anti-dumping duties got imposed on imports of foreign cut-to-length steel plate, this time Brazil, Turkey and South Africa. Some of the dumping duties are as high as 94%.

It was an equally bad week for the U.S., though, when it comes to international trade. A subsidy paid by Washington state in the form of tax breaks to Boeing for keep an assembly plant there was found to be a countervailable subsidy by the World Trade Organization in an unusually high-profile dispute. The European Union rallied around Airbus in fighting the subsidy and appealed it all the way to the WTO. That pitted the powerful economic bloc and one its biggest corporations, Airbus, against an equally prosperous and powerful nation with just as many trade agreements in the U.S. and one its major employers, Boeing.

With President-elect Donald Trump promising to crack down on foreign corporations, illegally dumped products and jobs exported overseas, this could be just one of many future WTO spats where the big boy nations get out on the legal field and play rough. It was reported that Trump used the carrot of federal contracts, this week, to keep a Carrier plant in Indiana from taking its 1,000 jobs and moving to Mexico. Could such nudges be used as proof of subsidies in future WTO disputes? We're about to set sail for interesting times.

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Zinc Prices Hit an 8-Year High: Did you Miss the Rally?

Remember when Barack Obama defeated republican presidential nominee Senator John McCain? Or Usain Bolt's first appearance in the Olympic games? Well... that's how far back you need to go if you want to see zinc prices as high as they are now.

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Last week, zinc closed just short of $2,300 per metric ton on the London Metal Exchange, the highest level since early 2008. Zinc is the first industrial metal we can say that about (and possibly not the last one).

[caption id="attachment_82119" align="aligncenter" width="500"] Zinc hits an 8-year high. Source: MetalMiner analysis of Fastmarkets.com data.[/caption]

Zinc markets moved into deficit this year following the shutdown of some big mines. The International Lead and Zinc Study Group (ILZSG) anticipates that global usage in 2016 will exceed production by 349,000 mt. In 2017, the market is expected to remain in deficit with the extent of the shortage forecast at 248,000 mt.

[caption id="attachment_82120" align="aligncenter" width="500"] How our subscribers bought zinc this year. Source: MetalMiner analysis of Fastmarkets.com data.[/caption]

Whether fundamentals justify zinc's spectacular rally or not is debatable. What's not debatable is that there is no way you can time your purchases by just looking at the fundamentals. You need to understand how prices move, or have someone do it for you.

The first thing you need to know is what kind of market you are in. Are you in a bear market or a bull market? Industrial metals were in a bear market since 2011 until they hit a floor in January. Since it's impossible to consistently pick the exact market bottom, we always recommend to hedge when prices are finally showing strength.

That happened back in April, when we saw enough evidence to call a bull market in industrial metals. At the same time, zinc prices were consolidating after rallying in the first quarter. Then, zinc managed to break out of that price consolidation (click here for what a price consolidation is). Given zinc's bull narrative of supply shortfall, a confirmed bull market in industrial metals and zinc's strong price action, we recommended our subscribers to buy one year worth of demand on the first of May, when prices were trading at $1,900/mt.

Then, Zinc prices continued to move higher but, since the future is always unpredictable, you can't just buy at any price. Markets can always turn the other way around and you don't want to buy large quantities just before markets turn around. Therefore, you need to wait for another strategic point to hedge/buy forward again.

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That happened again on the first of November. The bullishness across the metal complex became more and more obvious and zinc prices broke out from another consolidation, confirming that there was a high probability that prices would move higher. On the first of November, we recommended our subscribers to buy six-months forward when prices where at $2,420/mt.

Bottom Line

Zinc buyers that followed our strategy will be buying zinc in 2016 at an average price of $1,830/mt. Those that simply bought month by month will pay and average of $2,080/mt, or 13% higher. Moreover, those that followed the strategy will have locked in their purchase requirements for 2017 at an average price of $2,160/mt while the others will enter 2017 with quotes near $2,900/mt.

What This Means For Metal Buyers

Zinc prices might look expensive, but they still look strong and could continue to move higher. Buyers need to pay attention to capitalize on future strategic points to hedge/buy forward. On the other hand, if markets turn around, buyers need to identify those turning points to start buying down the market.

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Is the Euro Heading For Parity With the US Dollar? Many Think So

It's not the first time, but the United States of America and Europe seem to be heading in opposite directions.

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In this case, it's their currencies that are going opposite directions. The U.S. dollar's rise and the euro's fall are being driven by policies and perceptions of what those policies mean for growth and prosperity next year. The big questions for firms with business interests in both camps is does this mean we could see parity between the dollar and euro next year?

[caption id="attachment_82079" align="alignnone" width="300"] Source: Analysis UK Ltd.[/caption]

The euro was last at parity with the dollar in late 2002, but the first half of the decade saw expectations for strong growth in Europe after the financial crisis followed by a flight to safety that maintained a relatively strong euro relative to other currencies.

How the US Dollar Got its Groove Back

While the recovery of the U.S. economy has been somewhat unspectacular, it has at least been steady and heading in the right direction for the last few years. Europe, on the other hand, has been plagued with banking fears, political unrest and slow if not stagnant growth.

As a result, the European Central Bank has embarked on a monetary policy that has pushed rates into negative territory and involved quantitative easing with a huge bond buying program. Expectations of economic growth have jumped following the surprise result of the American presidential election and that has been supporting for the U.S. dollar as President-elect Donald Trump’s promises of infrastructure investment and tax cuts, financed by increased debt, have significantly raised the prospects for early and subsequent Federal Reserve interest rate increases.

What This Means for Euro-Denominated Trades

The euro’s continued decline could be good for European economies as the weaker exchange rate will make the region's exports more competitive and should encourage inflation, which has remained stubbornly below the ECB’s target of 2%. As the U.K. will find, with the weaker currency, some dollar-denominated imports such as oil and natural gas will rise in cost. Still, few in Europe are likely to object to a more competitive exchange rate.

The euro fell to a low of $1.046 in March on the expectation that the Fed would raise rates at least once or twice during 2016. In practice that hasn’t happened, resulting in a minor retrenchment. Now, the euro is likely to plumb those depths and more in 2017 as the Fed is expected to raise rates in December and it's contemplating, according to Goldman Sachs, a further three rate increases in 2017.

Not everyone however is in agreement that parity is a certainty in 2017. A Wall Street Journal article quotes Jeffrey Yu, head of the U.K. investments office at UBS Wealth Management saying “If you just look at how the euro-zone has performed in terms of data, things look better than they did the last time people were gunning for parity.”

The euro-zone economy has grown slowly but consistently for each of the last nine quarters, expanding by between 0.3% and 0.8% of gross domestic product every three months. The euro’s weakness is not just down to the economy. Doubts exist about the political robustness of the European model. This year, the United Kingdom voted to leave the European Union in a shock June referendum. Next year will see elections in France, the Netherlands, Germany and a host of smaller states with populist, largely anti-globalization parties coming to the fore. Continued modest growth is by no means a certainty, but anxiety driven by this uncertainty is weighing on the euro and driving its decline against the dollar.

For firms selling into the European market, forward hedging may be a prudent move. For those sourcing or buying from — or exposed to euro-priced supplies — look out for cost reduction opportunities if the currencies continue toward parity.

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About That Spinoff… Alcoa’s Split Doesn’t Go As Expected

In October, Alcoa, Inc. divided the company into two separate entities. The split created a commodity-focused company which retains Alcoa’s name and its upstream business. The second entity, called Arconic, now operates as the company's downstream business.

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When the split was announced last year, Arconic was supposed to drive value for shareholders once listed as a separate entity while Alcoa's stock price was expected to remain depressed since, at the time the split was announced, aluminum prices were trading near their 2009 lows.

[caption id="attachment_82046" align="aligncenter" width="500"] Alcoa shares have risen near 50% since the company split. Source: MetalMiner analysis of @stockcharts.com data.[/caption]

Guess what?

Alcoa shares have risen nearly 50% in less than a month... or since the company formally split. The undergoing bull market across the industrial metals complex put aluminum prices trading at a 15-month high this month.

Not only have Alcoa shares exploded, but Arconic shares have fallen significantly since the split due to concerns over the health of the aerospace industry, a major customer market for Arconic.

[caption id="attachment_82047" align="aligncenter" width="500"] Arconic shares have fallen since the split. Source: MetalMIner analysis of @stockcharts.com data.[/caption]

To conclude: Market dynamics have changed since Alcoa announced the split. If aluminum and aluminum prices keep on rising, which is likely, Alcoa's upstream business will continue to be the investor's pick in 2017.

[download-button url="https://agmetalminer.com/monthly-report-price-index-trends-november-2016"] Free Download: Price Trends in the November MMI Report[/download-button]±

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Dow Jones Industrial Average Highest Since 2011, China Steel Output Up

The Dow Jones Industrial Average opened at a record high today, driven by financial stocks, after the index capped off its best week since 2011 following Donald Trump’s unexpected victory in the U.S. presidential election.

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Since Trump’s triumph last Tuesday, investors have been betting on his campaign promises to simplify regulation in the health and financial sectors and boost spending on infrastructure.

The financial index rose 2.18% to its highest level since 2008. Goldman Sachs and JPMorgan provided the biggest boost to both the S&P 500 and the Dow. Stock markets around the world were affected by a continued selloff in the global bond market as investors looked for more clarity regarding Trump’s policies.

Chinese Steel Output Increases in October

China's steel output rose 4% to 68.51 million metric tons in October from a year ago, government data showed, as steel mills in the world's top producer further expanded production.

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Total output for the first 10 months of 2016 edged up 0.7% to 672.96 mmt, data from the National Bureau of Statistics also showed on Monday.

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InfraTrumpture: What President-Elect Trump Means for Infrastructure

As the dust settles from President-Elect Donald Trump's historic win last week, we're starting to see what it might mean for infrastructure.

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The Wall Street Journal said last week that his $1 trillion building proposal relies entirely on private financing, which industry experts say is likely to fall far short of adequately funding improvements to America's crumbling roads, bridges and airports.

[caption id="attachment_81934" align="aligncenter" width="550"] Is it a brand new day for privately funded public infrastructure projects? Or can only direct federal spending fix our roads, rail stations, bridges and airports? Source: Jeff Yoders.[/caption]

Trump wants private investors to put money into projects in exchange for tax credits totaling 82% of the equity amount. His plan anticipates that lost tax revenue would be recouped through new income-tax revenue from construction workers and business-tax revenue from contractors, making the proposal essentially cost-free to the government.

The Trump/Navarro PPP Plan

Peter Navarro — a public-policy professor at the University of California, Irvine, and an adviser to Trump — wrote on his personal website that, "For infrastructure construction to be financeable privately, it needs a revenue stream from which to pay operating costs, the interest and principal on the debt, and the dividends on the equity... The size of the required equity cushion will, of course, vary with the riskiness of the project. However, we are assuming that, on average, prudent leverage will be about five times equity. Therefore, financing a trillion dollars of infrastructure would necessitate an equity investment of $167 billion, obviously a daunting sum."

To encourage investors to commit such large amounts, and to reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount, Navarro wrote.

What Trump and Navarro are proposing is a tax break-for-investment scheme that will essentially create thousands of public-private partnerships to finance the projects. Experts and industry officials say there are limits to how much can be done with private financing because privately funded projects need to turn a profit. These experts say they are better suited for major projects such as toll roads, airports or water systems and less appropriate for routine maintenance, such as repaving a public street.

That's fair criticism, but also evidence of how reliant the construction industry has become on direct, federal financing. PPPs have been successful on major underground sewerage/storm drainage and department of defense projects. The PPP model concentrates responsibility and control over all phases of the asset lifecycle and, therefore, has an advantage over traditional practices because it creates a lot of economies of scale and efficiencies. By aggregating a full construction program plan for infrastructure design and replacement, it’s far more easily financed than smaller piecemeal projects such as the road paving projects mentioned above that often are only possible to finance through municipal budgets.

Isn't basic maintenance what we have municipalities and local budgets for in the first place? Sure, there will be some interstate highways that just need basic maintenance but many are in such bad shape — and haven't been updated in so long — that widening or rerouting could qualify them as "big" projects. The Trump plan, like much of what the president-elect does, follows the Daniel Burnham adage, "make no small plans."

It's big — huge, really — and will focus on interstates, airports, underground water/wastewater, military infrastructure and less on simple maintenance. Investors will be drawn to the bigger projects and the simpler ones will be left to states and municipalities who will have the funding burden of new taxation passed on to them as well. Historically low interest rates have made it very cheap for state and local governments to borrow directly on the municipal bond market.

The 2013 American Society of Civil Engineers Infrastructure Report Card shows that the U.S. has a significant backlog of overdue maintenance across our infrastructure systems but also a pressing need for modernization. Most modernization projects would qualify as large infrastructure investments and fit the bill for the Trump/Navarro PPP plan. Smaller routine maintenance would be delegated to the states and municipalities.

Worker/Tax Revenue Shortage

What IS very unclear is how Trump’s proposal would generate enough new revenue to offset the cost of the tax credits. If the construction workers hired on the new projects were previously unemployed, the proposal would indeed generate significant new tax revenue. The problem with that is the unemployment rate for construction workers around has fallen to around 5.7%, so it's likely those workers would have found other jobs anyway.

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The projects might need to offer other employment incentives to entice enough workers... which would increase their overall cost above estimates. It's still early, but any completely privately financed infrastructure plan would face significant market hurdles.

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LME Copper Surges; US Steel Shipments Down in September

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%.

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LME Week Ends Without Calamity; Copper Benefits From Last Pre-Election Purchases

There was no booing and no slow handclapping when Garry Jones, chief executive of the London Metal Exchange (LME), rose to address the exchange's annual black-tie dinner at the Grosvenor House Hotel in London.

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There had been considerable speculation as to what sort of reception he would get after a year of falling exchange volumes and a protracted dispute with brokers over trading fees.

But decorum was maintained and Jones was in conciliatory mood, accepting with "some humility" that things hadn't gone "as well as we hoped." Reuters' Andy Home has more.

Last Pre-Election Purchases Help Boost Copper

LME copper prices see-sawed in positive and negative territory on Tuesday after posting hefty overnight gains on growing signs that Hillary Clinton will win the U.S. presidential election over her Republican rival Donald Trump.

Shanghai copper futures showed consistent gains, with some traders hedging expectations that the value of the U.S. dollar would erode if Trump eked out a victory.

Democratic candidate Clinton is viewed as a status quo candidate with more predictable policies than Trump. That means news favoring Clinton tends to boost risk appetites.

Helen Lau, an analyst for Argonaut in Hong Kong, said that in the longer term, a Clinton victory could spur industrial activity and greater metals consumption, the immediate impact of a Trump win and a weaker dollar would be "knee-jerk" buying.

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"If Trump wins, then there is the possibility the dollar will go down and that's good for consumption in China," she told Reuters.

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London Metal Exchange Aluminum Price Keeps Rising, Why?

Many active investors in the aluminum market will have watched, perplexed and confused, as to why the London Metal Exchange price continues to rise, yet the fundamental reality is one of, if not an oversupplied market, at least one with no shortage of metal in storage.

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Producers will claim some credit for cutting capacity and talking up demand, which — to be fair — both positions hold some water. Western smelters in the U.S. and Europe have been relentless in cutting uneconomic refining in the face of weak prices.

[caption id="attachment_81694" align="alignnone" width="300"] Source: CRU[/caption]

This graph from CRU shows the steady demise of the U.S. primary aluminum smelting industry and you only have to Google “closure of aluminum smelters” or something similar and you will get a litany of stories about smelters being closed or facing imminent closure around the world.

Production Overseas

At the same time, though, production in the Middle East has jumped from 0.9 million metric tons (mmt) in 1999 to an expected 5.7 mmt this year, and Chinese primary production has skyrocketed from 2.6 mmt in 1999 to reach 31.2 mmt in 2015, with more to be added in 2016.

So, western smelter closures should, in and of themselves, have only limited impact on primary metal shortages and prices. If they create anything of a shortage of metal, it should be reflected more readily in the physical delivery premium, but those have come down steadily from peaks in 2015. Although U.S. midwest delivery premiums are higher than European or Japanese — accurately reflecting the relative tightness of those three market regions to each other, they are still near the historic norms.

So, what is driving the current upward trend in LME prices? This week they have topped $1,700 per metric ton, hitting 15 month highs in a clear upward trend since early September

[caption id="attachment_81695" align="alignnone" width="300"] Source: London Metal Exchange[/caption]

Investor sentiment has been bullish, driven in large part, Reuters says, by a narrative of falling LME inventory meaning a looming shortage of metal. But Reuters goes on to suggest caution into reading too much into the drawdown in headline LME stocks. The paper says global inventory is anything but dwindling.

"The drawdown in LME stocks to an outsider would suggest a tighter market, but that's only on the LME."

Deciphering Demand

Certainly stocks of aluminum in LME-approved warehouses have fallen more than 60% to 2.14 mmt from a record high of 5.49 mmt in January 2014.

But global aluminum stocks are estimated at around 15 mmt compared to global consumption estimated at around 58 mmt this year and are expected to increase further due to rising output in top producer China. Nor is China’s aluminum in the parallel universe that Alcoa CEO Klaus Kleinfeld once dubbed it, technically locked up behind a 15% export duty.

It is, in reality, flooding out in the form of semi-finished product and even primary posing as semis and destined for remelt. That's the very reason why Japanese physical delivery premiums are lower than European or North American.

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So, why when global inventory is still so high are LME stocks being drawn down?

Well, according to Reuters, we have the LME rule changes to thank for that. Since 2013, the LME has implemented measures aimed at reducing queues for aluminum as it leaves the LME system, the article says.

Measures to cut queues included higher load-out rates for metal to leave warehouses and a freeze on maximum rental rates, but the most effective, so far, has been the cap on rents. The rent payable on metal stuck in a queue longer than 30 days drops by half and after 50 days no rent is payable on LME metal.

"The rent capping is why so much aluminum has left the exchange, warehouses don't want the metal in case they have to store it for free," the head of one commodities brokerage is quoted by Reuters as saying.

Distorted Exchange Markets

Exchange markets like the LME should reflect the reality of supply and demand, but that is in a perfect market that works 100% efficiently and with all parties in possession of all information.

In real life, liquidity is provided by investors and they have varying levels of visibility to the underlying supply market and variable timeframes to which they are working.

If you are a short-term investor and you see an upward trend based on a wider perception of tightening supply due to falling exchange inventory, you may well jump on the bandwagon and ride the curve for as long as it looks viable — days, weeks, maybe even months, before reality sets in for the wider market and it takes a reverse.

Reuters' position is clear: There is no shortage of global aluminum inventory. The drawdown in LME stocks is not a result of a tight western market, it is a reflection of a distorted warehousing structure. Although changes were made by the LME with the best of intentions, and ultimately will likely prove to be the right decisions, in the short term it has caused a massive outflow of metal that is creating a distorted view of supply and demand.

The post London Metal Exchange Aluminum Price Keeps Rising, Why? appeared first on Steel, Aluminum, Copper, Stainless, Rare Earth, Metal Prices, Forecasting | MetalMiner.

from Steel, Aluminum, Copper, Stainless, Rare Earth, Metal Prices, Forecasting | MetalMiner » Investing Hedging https://agmetalminer.com/2016/11/07/london-metal-exchange-aluminum-price-keeps-rising-why/