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Mixed Outlook for Global Metals Prices

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Despite ongoing growth in the United States, economic activity in both the Eurozone and Asia remain sluggish for different reasons. A cornucopia of events—from uncertainty in Ukraine, to new government regulations out of China and the Philippines, to growing price disparities between primary and scrap metal, and added production capacity—will affect metal demand and price trends for different regions over the next few quarters.

LME copper prices at the beginning of May were at $6,670 per metric ton, hitting a high of $7,183 before settling to $6,973 in early September. Despite the volatility, European copper cathode premiums were getting slammed, steadily dropping from $145 per metric ton to current premiums reported at $80 per ton. Conversely, during the summer, discounts held for high grades of copper scrap. The story line, though, is beginning to change as the Eurozone struggles to jumpstart its economies.

The story was different in the United States as copper cathode premiums averaged 6 to 7 cents per pound, delivered to the Midwest. Discounts for higher grade copper scrap reacted to softer demand from China, with domestic spreads increasing as the backwardation (cash price quoted at a higher value than the forward month) reversed in July when the market moved to a contango (forward months trading at a higher value).

Europe entered its traditional seasonal slowdown in July and August, which continued into September. Many manufacturing plants scheduled complete shutdowns for vacations or maintenance during the summer months, which effectively reduced demand for raw material. Anticipating a slowdown, sellers released inventory in June and July, causing a glut of scrap at both copper refineries and steel mills, which consume copper and stainless steel scrap.
Copper refineries and copper tube makers contacted by all confirmed they had satisfied their raw material needs for the next several months and any further buying would be done at increased margins. The large stainless steel processors and blenders all reported that the steel mills will be reducing their buying requirements for the next few months, and the blenders will take in additional inventory only at better prices. The possible bright spot is that the European aluminum business is mixed, with secondary aluminum scrap nonetheless in demand for making automotive alloys.

Stainless processors in Rotterdam took advantage of stronger demand in the United States in the first and second quarters by moving cargos to Alabama’s Outokumpu mill. However, production snags and maintenance shutdowns reduced their overall demand. As a result, cargos will not be moving to the U.S. in the next few months.

China is continuing to reduce its aluminum output by closing older and less efficient plants. The closures are contributing to the reduction of global output, which could result in a global supply deficit by the end of 2014 and into 2015.

Meanwhile, the Gulf countries are continuing to operate at capacity with plans to increase their operations with new plants. The newly formed Emirates Global Aluminum (EGA) is in the process of expanding capacity in the UAE; ALBA (Aluminum of Bahrain) is doubling its capacity; Ma’aden Aluminum (Saudi Arabia) formed a joint venture with Alcoa and will increase capacity by as much as 50 percent. Furthermore, OARC (Oman Aluminum Rolling Co.) is starting up its new rolling mill, which will offer a range of gauges from a quarter inch to as thin as foil.

Asia is a different matter. Reports indicate China is continuing to limit access to specific financial agreements that use metal stored in warehouses as collateral, in essence stifling demand and production. As a result, imports of copper scrap have drastically dropped. Other Asian countries such as Korea and Taiwan are continuing to operate, but have limited capacities compared to China.

The iron ore giants Rio Tinto and Vale have turned the tables and are increasing production, pushing down the 62 percent iron ore prices and effectively shutting down high-cost producers in China. Moreover, the recent announcement that the Philippine government may want to impose export restrictions is providing a short-term bullish outlook for nickel, impacting China’s ability to produce nickel pig iron.

The outlier is Japan, Asia’s largest importer of aluminum ingot. The Japanese aluminum industry is trying to manage higher ingot premiums and skyrocketing aluminum scrap prices. Imported ingot grew by 19 percent to 1.02 million tons in the first half of this year compared to 2013. As evidence, the fourth-quarter premium for primary aluminum is expected to increase in the coming weeks to record levels. At this writing, speculation anticipates the premium to rise an additional $60 per metric ton from the earlier quoted $400 to $408. However, recent talks dampened traders’ high expectations, and may be settled more at an increase of $15 to $20 per ton.

This is on the back of a Bloomberg report that the appetite for aluminum scrap (primarily used beverage cans) has increase dramatically in Japan and the rest of Asia since last year because of strong global demand for vehicles. Sources report that Japan is exporting more aluminum scrap to take advantage of the weak yen and strong demand from South Korea. As a result, there is a shortage of scrap, which is triggering dramatic price increases. Currently, scrap aluminum is commanding a premium to the LME aluminum ingot price. As aluminum is increasingly being used for vehicles, premiums and scrap prices will be supported for the near future.

Regardless, commodity prices have been influenced and driven solely by speculators and hedge funds for the last six months. believes these same participants will be driving the prices in the fourth quarter. As LME aluminum inventories continue to drop, and the supply of primary metal moves into a deficit, fundamental market conditions between supply and demand will once again have an overriding influence on the aluminum price. Other base metals will stay under the thumb of outside forces.

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