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Copper Weekly Bulletin – N°2

G20 as the last hope for trade war resolution and global economic growth

The copper three-month future price rose for the fifth straight session on Monday reaching $6,259 a tonne and having gained 2.5 percent since last week. This was due to the prospect of a resolution to the US-China trade war, with President Trump announcing that China was willing to take steps to resolve the issue.

However, the hope of a resolution fell short at the APEC summit last weekend, where for the first time, US and China fail to agree on a communique. Divisions were evident at the summit and Vice President Mike Pence even threatened China that they will double the tariffs if they do not accept US demands. Therefore, the prices fell down to $6,240 on Tuesday and to $6,239 on Wednesday. It dropped again on Thursday to $6,217 following another clash between the two world’s biggest economies at a WTO meeting on Wednesday, however the price is supported by a weakening dollar therefore making it cheaper to buy dollar-backed commodities

In general, the price of copper as well as the other metals traded in a narrow range the whole week, but the price outlook could improve if the sigh of a potential resolution in the trade conflict rise with the G20 summit at the end of the month.

Since last bulletin, the premium price for cash over 3-month dropped from $31 to $18.50 on Friday, and it rose again to $21.50 which still points toward tight market.

Negative sentiment of the market has a huge impact on the copper price.

Strengthening supply

According to mining.com, the supply is quite strong at the moment and is expected to be even stronger thanks to a 3% increase expectation of Chile. This 3% increase expectation is due to an increase of 54,100 tonnes in the first three quarters of 2018, a 13% year-to-date growth over the same period of 2017. It makes experts confident that Chile is going to continue with the current pattern. As a reminder, Chile is the biggest world’s exporter and account alone for more than 30% of total world’s supply.

Moreover, it appears that this trend is not only happening in Chile but also in other countries such as Zambia for example. According to Kitco, Zambia has currently done 10% better than last year during the same period. It is thanks to the biggest mining companies improving machines to extract copper.

As the global supply of copper is strengthen, there price of copper is supposed to decrease in a near future.

COPPER SUPPLY: Headline inventories of copper in LME-registered warehouses MCUSTX-TOTAL fell by 9,400 tonnes to 151,625 tonnes, nearing last month’s 10-year low of 136,675. tonnes.

Since two weeks ago, the level of the open tonnage LME copper stock (tradable warrant) remain pretty stable.

Such a stability means that for the moment, copper supply and demand meet pretty well.

Backwardation in the future

The forward curve is in backwardation, as we can see on the table below, the current cash price was increasing until a few days ago (12.11.18 – 20.11.18) before decreasing these last two days. The reason of this backwardation is still due to the negative sentiment toward the slowing chinese economic growth as well as the trade war. People prefer to trade to go short and sell at the cash price rather than at the future price which is the reason why the LME still has a premium of $21.50 cash over the three-month.

 

Data valid for 21 november 2018

Source:

https://www.kitco.com/news/2018-11-21/Zambia-apos-s-copper-output-up-10-4-year-year-in-September.html

https://www.reuters.com/article/global-metals/metals-copper-edges-higher-ahead-of-g20-summit-idUSL4N1XU3ZK

http://www.infomine.com/investment/warehouse-levels/copper/1-month/

http://www.mining.com/copper-output-spike-worlds-top-producer-chile/

 

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Winter is coming (iron ore #2)

Movement of the 62%, Fe fines iron ore Price

At the begging of the month of November the price was at 73$/Mt and started to increase till the 9th November, since than the prices is decreasing till today at the price of 74.81$/Mt

The causes:

This is due to the arrival of the winter and to the regulation from the local government of Hebei in China. Hebei is the largest steel production province.

The local government of Hebei announced an “orange” alert for smog in the air forcing the mills of steel to reduce their production until 16 November.

Steelmakers want to maximize their output of steel before winter; therefore, they need a high quality of iron ore in order to obtain the higher margin as possible. That is why the prices went up.

Since the prices of steel is decreasing, in consequence the margin is lower for the Chinese mills. Which push them to buy low grade of iron ore (58%Fe) in order to maintain their profit margin because low-grade iron ore reduce cost.

Since the announcement of “orange” alert, Chinese companies has halve their production, which decreased iron ore, 62%Fe demand.

This graph shows the basis evolution of iron ore from July 2018 to October 2018.

From the middle of July until the beginning of August, the future price is higher than the spot price, which means it is a contango, there is enough supply and lower demand. It is a normal state of the market and the signal of it is that we should store.

Then the situation changes: the spot price is higher than the future price in August, so it is slip to a backwardation which means demand is greater than supply, the market is hot, people want to buy so we should sell and do not store.

Finally, from the beginning of September until October, we can observe that the situation of the market changes again into a contango state. There is more supply than demand and we should store the iron ore.

As the whole of Chinese steelmakers companies count for 74% of the iron ore global market share, if their demand in construction or transportation sector increase, the price of the iron ore will rise also.

Recommendation

We recommend going long because today the prices for future contract are decreasing until the end of 2019, show in the table below.

Sources:

Market Index. (2018). Iron Ore. [online] Available at: https://www.marketindex.com.au/iron-ore [Accessed 15 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Historical Prices – Investing.com. [Online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-futures- historical-data [Accessed 15 Nov. 2018].

Argusmedia.com. (2018). China’s steel profit margins accelerate falls. [online] Available at: https://www.argusmedia.com/en/news/1790676-chinas-steel-profit-margins-accelerate-falls [Accessed 15 Nov. 2018].

Scutt, D. (2018). Iron ore prices slump. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/iron-ore-prices-china-steel-demand-hebei-2018-11 [Accessed 15 Nov. 2018].

U.S. (2018). RPT-COLUMN-LME bets on new contracts to force steel industry…………………………………………………………………………………………………………………………………………… [online]

Available at: https://www.reuters.com/article/steel-pricing-ahome/rpt-column-lme-bets-on- new-contracts-to-force-steel-industry-change-andy-home-idUSL8N1XH4OV [Accessed 15 Nov. 2018].

MB, F. (2018). Iron ore pricing explained | Metal Bulletin.com. [online] Metalbulletin.com. Available at: https://www.metalbulletin.com/Article/3811904/Iron-ore-pricing-explained.html [Accessed 15 Nov. 2018].

Foundation, T. (2018). China’s Hebei province issues orange alert for smog. [online] news.trust.org. Available at: http://news.trust.org//item/20181112011729-8eqc1/ [Accessed 15 Nov. 2018].

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Copper Weekly Bulletin – N°1

Chinese economic slowdown and the trade war keep copper price low:

The 3-month copper price dropped on Monday November 5 after experiencing a two-week high last Friday following some comments made by the US president Donald Trump, on a probable approaching trade deal with China.

The copper price was trading at USD 6,315 a ton on Friday, its highest since October 22 but slipped down 1.5 percent to USD 6,191.50 a ton on Monday as investor took profits.

Since late September the price of the copper varied between a USD 5,950 and USD 6,400 range as the worries of trade war minimizes the effect of the shortage of the metal.

The LME also introduced a premium of USD 31.00 per tonne as concerns of a shortage rises which contrasts greatly with the discount of USD 47.00 at the end of October.

Indeed, the price of copper is a victim of negative sentiment. FocusEconomics noted at the beginning of the month that the price of the commodity is stable but is not going anywhere soon for two reasons: firstly, the chinese economy is slowing then because of the tariffs.

The price of the red metal was supported last month by the drop in inventories to the lowest in 10 years (see graph 1; on a 5 year-range only). Therefore, the drop helped to outweigh the chinese slowdown as well as the worries of a trade war.

Despite the negative sentiment, analysts forecast that the price of copper should rise in Q4 as new technologies such as renewables and electric cars will drive the demand of the commodity.

Graph 1: Warehouse Stocks Level

  

Inventory Level:

Graph 2: Inventory level and price

On 31st October, the LME copper inventory level was at his lowest in a decade. The day after, it increased from 57’650 (open tonnage) to 102’600 tonnes and directly stabilized around 100’000 tonnes.

We observe here (31.10.2018 – 01.10.2018) a common phenomenon between the price and the inventory level as the stocks suddenly increased when the price was relatively low.

At the same time and on a larger scale (2 weeks), we would expect the price to grow when the inventory fall. Usually, an inventory fall means that there is a shortage or an increased demand in the market. Therefore, such an increase in the inventory illustrates the actual uncertainty around copper supply and demand due to political factors.

Backwardation or Contango?:

Backwardation: In October, the trend in the 3-month future price shows that there is shortage on the supply side as the spot price is higher than the future price. It means that buyers need copper now, in that condition, a trader  should be “short” or sell his positions to not take carriage cost.

Sources:

https://www.voanews.com/a/china-xi-trump-phone-call-extremely-positive/4639713.html

https://www.reuters.com/article/global-metals/metals-copper-slips-on-profit-taking-idUSL4N1XG3CH

https://uk.reuters.com/article/global-metals/metals-london-copper-slips-from-two-week-top-idUKL4N1XG1RM

https://www.bloomberg.com/quote/LMCADS03:COM

https://uk.reuters.com/article/global-metals/metals-copper-rises-as-democrat-victories-in-us-weaken-the-dollar-idUKL8N1XI4OH

https://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/focuseconomics-chinese-growth-rhetoric-keeping-copper-down/

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China and the structural change on the iron ore market (Iron ore – Bulletin 1)

 Price movement recap

In May, the transaction activity for imported iron ore slowed down in China due to an general economic slowdown because China remains under threat from punitive US tariffs on Chinese imports. Then in June, the prices of iron ore fluctuated and in July, steel production restrictions due to China’s anti-pollution measures impacted China’s imports of iron ore : the demand of iron ore increased because China has to reduce its steel production. From August to October, prices of iron ore are gradually inscreasing.

 Dynamic of supply and demand

Due to the new anti-pollution rules registered in the Three-Year Plan Action by the China government, the Chinese steelmaker imports more iron ore.

However, they are looking for a higher quality of iron ore in order to pollute less. This 2020 action plan to air quality is leading to steel producers to offer a rich iron ore on the market as reducing costs as well.

To illustrate this structural change, International mining and Resources Conference, on this Monday 29th of October until today, the 1st of November in Melbourne, the CEO of Rio Tinto Group, Jean-Sebastien Jacques suggests new ways of mining because the issues of the protecting air, water and land are more important more than ever. He considers that the mining has seen as an “old industry” that it is necessary to modernise by using automation and artificial intelligence (AI).

In that sense, as the CEO of FMG, Elizabeth Gaines is introducing autonomous trucks automatizing their ways to production to propose a best quality to the China demand because China demand still very strong.

Finally, this structural change concerns all of iron ore companies. For example, the emerging iron ore company Finders Mines Limites (FMS) rating in the Australian Securities Exchange which is focusing on the exploitation of the mines in the Pilbara region (western Australia ) operates with discount rates for lower-grade and high-impurity iron ore in order to improve the quality of their iron ore.

 Recommandations

Since iron ore prices per metric tonne are constantly rising due to Chinese factors, we believe that it would be better to sell iron ore to earn a margin.

Sources

MB, F. (2018). ‘Structural change’ in iron ore market leads Flinders Mines to review options | Metal Bulletin.com. [online] Metalbulletin.com. Available at: https://www.metalbulletin.com/Article/3841133/Search-results/Structural-change-in-iron-ore-market-leads-Flinders-Mines-to-review-options.html [Accessed 1 Nov. 2018].

GmbH, f. (2018). Iron Ore PRICE Today | Iron Ore Spot Price Chart | Live Price of Iron Ore per Ounce | Markets Insider. [online] markets.businessinsider.com. Available at: https://markets.businessinsider.com/commodities/iron-ore-price [Accessed 1 Nov. 2018].

Creagh, B. (2018). Rio Tinto CEO targets a reinvention of mining – Australian Mining. [online] Australian Mining. Available at: https://www.australianmining.com.au/features/rio-tinto-ceo-targets-reinvention-mining/ [Accessed 1 Nov. 2018].

Eco-Business. (2018). China releases 2020 action plan for air pollution. [online] Available at: https://www.eco-business.com/news/china-releases-2020-action-plan-for-air-pollution/ [Accessed 1 Nov. 2018].

Mining-journal.com. (2018). “… no one at Fortescue is displaced as a result of automation”. [online] Available at: https://www.mining-journal.com/leadership/news/1341574/-…-no-one-at-fortescue-is-displaced-as-result-of-automation [Accessed 1 Nov. 2018].

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Bulletin 3 – Aluminum

Aluminum Futures Historical Prices

Source: investing.com

In our first bulletin, aluminium prices had increased significantly to skyrocket at 2,644 USD/t at the beginning of April when the initial sanctions were put into place. In comparison to our last bulletins, aluminium prices have slightly increased reaching (2.333,25 USD/t, as of 16thMay). The reasons for this increase after the sanctions were postponed to October is the reverse cancellations of orders at the Malaysian port of Port Klang earlier this week. The LME registered back 138’650 tonnes at the same location. The level of price is trying to find its mark since the report of the US sanctions against Russian companies to the 23rdOctober 2018.

Forward Curve Primary Aluminum LME

Bloomberg (2018) Bloomberg Professional [Online]. Available at: Subscription Service (Accessed: 16th March 2018)

Like our second bulletin, the forward curve for aluminium as of the 16th Mai on the LME begin by a backwardation between around 06/2018 to 09/2021. The market is in backwardation because traders expect to experience an overproduction outside the United-States. This overproduction is due to the sanction against Rusal and the US threats of tariffs that might touch the EU in June 2018. Then it changes into a supercontango beginning 2022. We still have an artificial physical shortage as trader keep the metal in their warehouses. Traders are long physical and short future. Their goal is to take advantage of the supercontango.

Forward curve

Source: lme

Rusal:

The impact of the US sanctions over the companies are not measurable yet. Rusal experienced an excellent year in 2017 and its result for the first quarter of 2018 (total revenue of 2.744 billion US dollars) is comparable with the trend of 2017. The aluminium company released its first quarter result last week. The company has performed truly well with an increase of 20.4 % of its adjusted EBITDA in comparison with the overall 2017. The revenue linked to the sale of primary aluminium went up of 16.9% for the first quarter of 2018.   Nevertheless, it is true that Rusal performed slightly better during the last quarter of 2017. The US sanction hit the company truly recently and thus has had almost no impact on the P&L of the Russian company yet. Indeed, the US sanctioned the Russian company only the last week of the first quarter. During the release of its results, Rusal has tried to calm its stakeholder and the market about the impact of the US sanction and has guaranteed that the company will respect its commitment regarding its creditors, shareholders and investors. Nevertheless, Rusal admitted that at the moment nobody can measure how badly the business will be touched in the long-run.

The stock market’s reactions represents well the situation. Rusal’s share on the Hod Kong exchange has lost about 65% of its value at the announcement of the initial sanctions. Not surprisingly, the shares of Rio Tinto, the oil producer seconding Rusal in terms of production, has seen its share increasing. The share price of Rusal is floating around 2.00 HKD and we do not see it regaining strength in the upcoming future as no solution to the sanctions has been found yet, and the company has just received some breathing space.

Source: Bloomberg

Source: Bloomberg

TRUMP VS Tusk and all his European friends

On Wednesday 16thof May, there was a European summit in Sofia where all the main leaders of European countries met. During that summit, the different leaders wanted to show their unity regarding the threat of the American tariffs for the aluminium and steel. The European Union is exempted of the tariffs until the 1stJune 2018. The Union also discussed extensively about their willingness to respect their commitments with Iran and the nuclear deal.

Tusk during the summit:

“The EU and U.S. are friends and partners. Therefore U.S. tariffs cannot be justified on the basis of national security. It is absurd to even think that the EU could be a threat to the United States.” EU willing to discuss cutting trade barriers with U.S.: MerkelIn bitter comments, Tusk said Trump has rid Europe of “all illusions” with the trade dispute and by pulling out of an international nuclear deal with Iran.

“Looking at the latest decisions of President Trump someone could even think: with friends like that who needs enemies. But frankly speaking, Europe should be grateful to President Trump. Because thanks to him we have got rid of all illusions. He has made us realise that if you need a helping hand, you will find one at the end of your arm,”

Video

https://www.reuters.com/article/us-usa-trade-eu/eu-heads-discuss-bold-or-fold-strategy-toward-trump-tariffs-idUSKCN1IH1VD

Sources

https://aluminiuminsider.com/rusal-pre-sanction-q1-recurring-profit-jumped-22-4-to-us531-mm/

https://www.lme.com/en-GB/Metals/Non-ferrous/Aluminium#tabIndex=0

http://investing.com

https://aluminiuminsider.com