Most base metals have coughed up earlier price gains in 2022. We have identified several potentially bearish items (and a few bullish items) related to slowing demand and rising energy costs.
Global Supply/Demand (Mostly Bearish, Surprise). In an attempt to stabilize the steel market, Cleveland-Cliffs has increased prices for its flat-rolled products by $60/st, the company announced earlier this week. The price increase applies to Cleveland-Cliffs’s cold rolled coil (CRC), hot rolled coil (HRC), and hot dipped galvanized (HDG) coil products. This is first such announcement since late-August, when Cleveland-Cliffs and several competitors increased prices by $50 to $75/st, respectively. Prior to the late-August announcements, HRC prices were down nearly 50% on the year; however, price increases by Cleveland-Cliffs and other did little to stem the tide. HRC prices are down nearly 20% from August 30, as Argus’s November 22 HRC assessment was $628/st. AEGIS notes that these price increases could be attempts to stave off unprofitability. Earlier this month, some steel producers interviewed by Argus stated that HRC prices could be nearing a bottom, as most are operating at breakeven or even at a loss.
Due in part to a recovering global automotive sector, platinum usage will jump 19% year over year to 7.77 million oz in 2023, according to the World Platinum Investment Council (WPIC). This jump in demand, along with supply issues in South Africa, will push the market into a deficit of 303,000 oz next year. This is a large shift in demand, as a surplus of 804,000 ounces is expected this year. Increasing vehicle production and stricter emissions regulations are driving the boost in automotive demand. Also, some manufacturers are substituting palladium with cheaper platinum. Swapping palladium for platinum will account for nearly 500,000 oz of platinum demand next year, according to WPIC figures. (Source: Reuters)
USD/Federal Reserve Policies (Mostly Bearish, Equally Priced In/Surprise). On November 2, the Federal Reserve raised interest rates by 75 bps, putting the Fed Funds target rate between 3.75% and 4.00%. They also stated that they will need ongoing hikes until rates are “sufficiently restrictive,” and will also consider the “cumulative tightening” and lags in economic data. During his press conference, chairman Jay Powell stated that it is “very premature to think about pausing rate hikes.
As for the US Dollar, the USD index has dropped precipitously since early November and is now trading at levels not seen since August. However, it seems to have stalled for the moment as the DXY has largely traded sideways since mid-November. That said, it is still up about 11% for the year. Due to the inverse relationship of the DXY and dollar-denominated commodities, this interest rate policy is generally bullish on the DXY, and therefore likely to continue to weigh on CME & LME metals prices. As always, we will continue to watch the Federal Reserve’s actions and any hints of future rate hikes.
Energy Costs (Bullish, Surprise). We have been keeping a very close eye on European electricity prices, as it is one of the main drivers for aluminum smelter profitability in that region. Electricity prices have fallen from recent highs, but not enough to entice those that have idled production to restart smelters.
As for CME natural gas prices, after falling 50% between mid-August and mid-October, prices are now on the rebound. Winter ’23 contracts have rallied nearly $1.40/mmBTU of the lows and are now trading near $7/mmBTU. Summer ’23 contracts are trading near $5.40/mmBTU. Thus, this market remains backwardated, but the backwardation has decreased dramatically in recent weeks. This backwardation is favorable to natural gas consumers such as aluminum extruders. This could be a good time for such consumers to hedge future natural gas needs at prices that are well below spot. We also note that natural gas prices have been extremely volatile in recent weeks. Please contact AEGIS for specific strategies that fit your operations.
Economic Slowdown (Bearish, Equally Surprise/Priced In). Most recent economic data shows that economies throughout the world are slowing. This will likely weigh on metals prices and demand. However, we will keep reading the “tealeaves” for any hints economic recoveries and predicted ramp-ups in metals demand.
Tariffs (Bearish, Priced In). The Aluminum Association does not anticipate any revisions to the current Section 232 tariffs on aluminum imports, despite continuing talks with federal officials. However, the association stated that any proposed changes should “be made very carefully so they don’t upset the current market conditions.” These comments, first reported by Bloomberg, were made at an aluminum industry conference held late last week.
Section 232 tariffs are at the discretion of the US executive branch and are allowed for reasons of national security. Current tariffs are 10% on aluminum imports. These tariffs were meant to reduce the flow of metals imports, thereby preventing foreign exporters from dumping cheap aluminum onto the US market. AEGIS notes the cost of the tariffs has supported the MWP. Reducing or eliminating those tariffs would likely reduce costs and perhaps prices in the U.S, as these tariffs are based on aluminum prices, and are built into the MWP.
Raw Materials (Bullish, Priced In). LME Copper prices surged over 10% in November, the first monthly price gain since April 2022. AEGIS notes that this was the largest monthly price jump since April 2021. We also point out that the recent uptick in prices is likely tied to China’s COVID and economic policies. Earlier this week, Chinese government officials stated they will “speed up” COVID vaccinations for the elderly, leading some to speculate that the government could start easing some COVID policies. Also, this week, in an attempt to boost its faltering real-estate sector, Chinese authorities relaxed financing restrictions on property developers. Last week Friday, to increase the country’s money supply, China’s central bank lowered the reserve requirement ratio (RRR) on domestic banks. The RRR is the percentage of funds that a bank must hold in reserve and not lend out. AEGIS notes that these measures could boost copper demand, and therefore could remain supportive of LME copper prices.
However, there is some bearish copper news weighing on the market. Workers at BHP’s Escondida copper mine in Chile reached an agreement with the company early Monday morning, thus avoiding a strike that was scheduled for this week. The workers were threatening to strike due to safety concerns, according to Reuters. The new agreement alleviates these concerns, as it contains” concrete and verifiable measures to improve the hygiene and safety of workers,” according to union statements. At 1.01 million mt, the Escondida copper mine produced nearly 5% of the world’s output last year, based on USGS and BHP data. (Source: Reuters, BHP, USGS)