Raw materials observatory. 2nd November 2009

New column on wiredrawing.net: "Raw materials observatory".

wiredrawing.net's staff is glad to announce the beginning of a new column on raw materials, edited by Dow Jones Financial Information Services.

Aluminum supported, copper showing strength.

Two themes will be dominating the base metals market in the coming weeks: the US-dollar and China’s commodity trade balance. But we believe that the weakness in the greenback will overshadow concerns over fading Chinese imports and/or rising exports, adding to the positive momentum in the metals markets. Aluminum LME cash prices will, in our view, comfortably surpass the 2,000 USD/t barrier before the end of November, while copper is on track to transcend 7,000 USD/t.

October saw some impressive developments in aluminum prices, but weaker stock markets and concerns over the pace of economic recovery weighed on prices towards the end of last week. Aluminum market fundamentals continue to be mixed. On the one hand, warehouses are well-filled in Asia and Europe. The contango structure of the forward curve suggests that oversupply is still an issue. Even after recent withdrawals, LME stocks remain comfortable at levels above 4,5 mln t. Shanghai stocks, too, are still at their highest level since 2003. Meanwhile, facilities are being restarted around the globe. In September, China’s smelters generated a record output of more than 40,000 t a day. Unless domestic consumption of the light metal increases sharply, the oversupply situation in the Chinese market will exacerbate in the months to come. This scenario raises concerns that China will dump its excess material on the global market. The SHFE premium over LME already falls, thus shifting towards a scenario in which material should be exported from China.

Or could demand actually keep up with current production growth? Things look good in China. Recent data showed that manufacturing activity was expanding in its fastest pace in 18 months in October. This includes metals-intensive sectors such as the automotive industry. The country looks on track to resume its old growth pattern. Economic indicators in industrialized countries meanwhile were mixed, though US GDP and EU PMI numbers were encouraging. Japan, too, has exhibited some strength as demand from the automotive, semiconductor and electronics industries is up.

Copper showing continued strength.

The demand revival will also support copper prices, even more so as we move into 2010.

Production of the red metal was up in China, though it remains weak overall compared to aluminum. The premium of SHFE over LME is higher than in other markets, but at no levels that call for rising copper imports into China. In addition, ongoing wage negotiations in Chile raise concerns over output there.

For now, the market is no longer in backwardation: In London, the 15-month contract is quoted at a modest 0.3% premium over the cash price. The storage market signals oversupply, mirroring the picture in the other base metals markets. In fact. LME stocks have continuously risen over the last month, while paradoxically, prices exhibited strength - just as we predicted in our last forecast. LME cash prices were up by more than 8% since mid-October, and are on track for further gains.

In sum, fundamentals still look weak near term, but improve as we move into 2010. There are signs of recovery and we believe that aluminum and copper prices have potential to the upside on account of the weak US-dollar and improving fundamentals. In addition, the past few weeks have shown that buying interest emerged whenever prices declined, which suggests strong support.

Losses for flat products have partially been materialized.

The losses for flat products that we predicted in our last analysis have partially been materialized: Prices for hot rolled coil in the European market have come down by roughly 2% since mid-October and 5% since late September. But even though market sentiment remains depressed in view of the overall weak fundamentals, we believe that flat product prices will move mostly sideways for the remainder of 2009. In our view, there are no impulses in sight that are strong enough to push prices in either direction - though if anything, more losses are by far more likely than gains.

Our outlook for the long products segment has deteriorated since mid-October. We are now taking a more bearish stance and believe that losses in the realm of 5 to 10 % before year end are well possible.

It looks like the bears have taken over the steel market once again after the short-lived recovery in the summer. Across all products and regions, material is more than ample, and oversupply threatens to destroy any timid recovery. After months of disciplined production cuts, some producers have expanded production too eagerly, and Chinese mills have been leading the pack: The Asian nation’s steel plants ramped up production throughout much of 2009. September saw the second highest monthly output on record in spite of governmental efforts to curtail production. Domestic Chinese demand is by far lagging these growth rates, leaving the country with high operational rates and overflooding inventories. Exporters have therefore eagerly shipped their goods to South Korea, Vietnam, or India. For European buyers, Chinese material is extra cheap, as the dollar-linked yuan has been weakening in line with the declining worth of the greenback. EU officials have rushed to impose antidumping tariffs on Chinese products, as Eurofer pressured to help the ailing EU steel sector.

Yet the cheap Chinese material is not as much of a threat to European steelmakers as it had been a few month back: Producers have some leeway on the price front as costs are on the decline, too. Scrap has shed value by more than 15% in the European market since late September - and in the absence of Chinese and Turkish buyers, further weakness is likely.

European mills, in contrast to Chinese, had rigorously cut their output earlier this year in an attempt to stabilize the market, but ramped up production quite extensively in September, according to Worldsteel. However, we expect EU-27 countries to cut output again in Q4/09 as Chinese goods reach European ports.

European buyers, meanwhile, are in no rush to purchase material. While shortages occurred during the summer, stocks have by now been replenished. Though inventories are still fairly low, they are more than comfortable for current consumption patterns. Real demand should remain weak over the next few months, as activity in most steel-consuming industries is far from growing. As the winter approaches in the Northern Hemisphere, activity in the construction sector should in fact come down even further and add to the negative momentum in the long products markets.

We therefore expect that transaction volumes will remain subdued in the next few months. Purchasers will exhibit a wait-and-see attitude as they gamble on weaker prices in the months ahead, knowing that material is available in abundance. The weak USD will support the dollar-nominated markets somewhat, but not enough to add value to the outright prices. Unfortunately, therefore, the steel market is likely to be immune to the euphoria that could recently be seen in commodity and stock markets. 

by Gianclaudio Torlizzi
[email protected]