Automakers' increasing use and Alcoa, Rusal production cut may lift Aluminum

Automakers' increasing use of aluminum use and production cut from Alcoa, UC Rusal cut may boost Aluminum.

According to BMO Research, market sentiment toward aluminum has improved. The potential for better demand growth fueled by Ford’s announcement of the F-150 aluminum body, combined with producers such as Alcoa and UC Rusal announcing production cuts, has lifted prospects for the light metal.

BMO Research sees increasing use of aluminum in auto production going forward, with 20% of auto production in the United States, Europe and China seen substituting aluminum for steel, based on estimated incremental metal use in the F-150.

Production curtailments are positive but it took four years of surplus markets and weak prices. The biggest downside risk to the positive momentum is the potential for idled capacity to restart as prices improve.

BMO upped its average base-case aluminum price forecasts to 80 and 85 cents a pound this year and next, respectively, compared to 79 and 83 cents previously.

The forecast increase is weighted toward premiums, expected to remain higher for longer due to the backlog of metal at key London Metal Exchange warehouses.

BMO revised its forecast for the U.S. Midwest premium to 19 and 17 cents this year and next from 17 and 12 cents previously.

With Mines Exhausted, Zinc Prices Might Be Ready to Break Out

Zinc has enjoyed one of the most positive fundamental pictures of all the base metals. The looming closure of major mines such as Century in Australia and Lisheen in Ireland next year due to mineral depletion has most analysts predicting the deficit of this year only getting worse in the years to come.

The three-month Lead price on the LME closed on Monday at $2113/ton and the picture is starting to look more bullish than bearish for zinc.

The fundamentals point to market tightness and the chart pattern is quite bullish. It looks like Zinc might be able to finally break above $2,200/t. In that case, Zinc will reach an almost 3-year high which translates into high price risk.

The right moment to go long is if Zinc breaks above $2,200/t. This might seem contradictory as you might be asking: why not buy now when prices are cheaper? Well, the reason is that there are many chances of seeing Zinc bounce back down, which is what happened in the beginning of 2013. However, if prices manage to break above resistance levels, that’s the moment with the highest probability of Zinc surging, therefore, the best time to buy/hedge.

What This Means For Metal Buyers

Zinc is showing more strength than weakness. We might see Zinc reach a three-year high this year. We recommend zinc buyers to watch the market closely and take long-term positions if prices break above $2,200/t.

MCX hopes to launch new contracts after transferring Financial Tech stake to escrow account

MCX may move the commodity market regulator Forward Markets Commission to lift the ban on launch of new contracts after amending the Articles of Association and transferring the promoters’ stake to an escrow account.

The exchange has proposed a special resolution to make the amendment and sought shareholders’ approval through postal ballot. The entire process is expected to be completed by June 18, said MCX in a written response to a questionnaire from Business Line.

Upon implementing the amendment, MCX is hopeful of getting approval for its contract launch for 2015 from FMC, the exchange said. However, FMC had said the promoter’s stake in the exchange should come down to two per cent from 26 per cent for it to lift the ban.

Time ticking

The exchange has next two to three months to abide by FMC order as it launches new contracts in different commodities three to four months in advance. The exchange clarified that it has approval from FMC for all contracts across commodities for the calendar year 2014.

“The exchange is making all efforts to comply with regulatory directives and would request for the approval of the 2015 calendar,” it said.

Meanwhile, Financial Technologies (FTIL) has moved the Bombay High Court challenging the authority of FMC to amend shareholding norms for commodity exchanges. It has also made MCX, which is amending its articles of association, a respondent in the case. The case is slated to be heard by the Bombay High Court on Friday.

Audit hits divestment

FTIL’s attempts to divest its 24 per cent stake in MCX have been hit after PricewaterhouseCooper audit revealed major discrepancies in MCX. The special audit was ordered by FMC.

Late last year, FMC declared Financial Technologies and its promoter Jignesh Shah as not ‘fit and proper’ to own stake in commodity exchange after National Spot Exchange, a subsidiary of FTIL, failed to settle trade worth ₹5,600 crore.

Turnover on MCX has fallen sharply in last few years due to settlement scam at its subsidiary NSEL and sharp fall in bullion prices. In May, MCX turnover was down 67 per cent at ₹397,780 crore against ₹1,219,271 core recorded in the same period last year.

Oil Rallies as Extremist Advance in Iraq Threatens Crude Supply

West Texas Intermediate crude headed for the biggest weekly advance since December and Brent gained as escalating violence in Iraq threatened supplies from OPEC’s second-largest oil producer.

Futures rose as much as 1.1 percent in New York, extending a 2 percent rally yesterday, the most in two months. Iraqi Oil Minister Abdul Kareem al-Luaibi speculated that U.S. planes may bomb his nation’s north as militants linked to al-Qaeda, who captured the city of Mosul this week, moved south toward Baghdad. The member of the Organization of Petroleum Exporting Countries produced 3.3 million barrels a day last month, data compiled by Bloomberg show.

“There’s potential for disruption to spread around the Middle East and we’re talking about significant amounts of daily supply,” Michael McCarthy, a chief strategist at CMC Markets in Sydney who predicts Brent may climb to $125 a barrel if there’s an attack on Baghdad. “The market got concerned about potential disruption in Libya; Iraq is a much more serious situation.”

WTI for July delivery gained as much as $1.15 to $107.68 a barrel in electronic trading on the New York Mercantile Exchange and was at $107.02 at 2:52 p.m. Sydney time. The contract rose $2.13 to $106.53 yesterday, the highest close since Sept. 18. The volume of all futures traded was four times the 100-day average. Prices have advanced 4.3 percent this week.

Brent for July settlement, which expires today, increased as much as 73 cents, or 0.7 percent, to $113.75 a barrel on the London-based ICE Futures Europe exchange. The August contract climbed 19 cents to $112.61. Front-month prices are up 4.4 percent this week, the most since July. The European benchmark crude was at a premium of $6.23 to WTI.

Iraq Fighting

The group that calls itself the Islamic State in Iraq and the Levant, know as ISIL, seized Mosul on June 11, forcing a halt to repairs at the main pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey. There were conflicting reports that Baiji, the site of Iraq’s biggest refinery, had been captured.

Prime Minister Nouri al-Maliki’s Shiite-led government is struggling to retain control of Sunni-majority regions as his army units in northern Iraq collapsed amid the extremist advance. U.S. President Barack Obama said he won’t rule out using air strikes to help the government in Baghdad.

The fighting hasn’t spread to the south, which the U.S. Energy Information Administration estimates is home to three-quarters of Iraq’s crude output. The country shipped 5.43 million barrels from the Basrah terminal on the Persian Gulf on June 11, according to al-Luaibi, the oil minister.

Libya, Iran

OPEC, responsible for 40 percent of global oil supply, maintained its production target at 30 million barrels a day at a June 11 meeting in Vienna, leaving output below projected demand for the rest of this year. Group member Libya is pumping at about 10 percent of its capacity because of unrest while Iran next month faces an end to relief from international sanctions, which could curb exports.

WTI may rise next week on concern the conflict in Iraq will disrupt shipments, according to a Bloomberg News survey. Seventeen of 26 analysts and traders, or 65 percent, forecast futures will increase while three said prices will decline.

Copper market on alert for LME inventory influx amid China probe

Thousands of tonnes of "invisible" copper now being hurriedly ushered out of some Chinese warehouses may remain out of sight for months longer, as banks and traders seeking safer havens for their metal opt out of the London Metal Exchange network.

The fear of fraudulent financing at some storage depots in Qingdao port has prompted some banks and merchants to cut credit for financing deals or relocate metal to better-known warehousing firms, including some in South Korea and elsewhere that are part of the LME's vast system. 

The shift away from China's opaque warehouses fueled concern among traders of a potential rise in stockpiles warranted in the LME network, data that would likely add pressure to sliding prices. As much as 300,000 tonnes of copper, nearly twice the entire inventory held in the LME's global warehouses, could be released by September, according to analysts at Macquarie.

But it is far from certain how much, if any, of that metal will appear in the LME's daily tallies, say some market sources familiar with the complex financing deals that have ballooned with China's loose access to credit.

Some of the metal is staying in China, moved to warehouses owned directly by operators, rather than rented by third-parties, say people involved in the market. That would be enough to placate companies worried about whether their stocks have also been pledged as collateral on another loan. [ID:nL4N0OS3S7]

Alternatively, it may still get sent abroad but to sheds run by exchange-approved companies in "off warrant" storage outside of the LME's official accounting system, some said - ensuring it is safe and secure but not necessarily deliverable.

The uncertainty over how much metal is being moved, and where it will end up, is the subject of frenzied speculation as banks scramble to assess their exposure to the alleged fraud, which has roiled the global copper market over the past week.

"The unwinding of these deals may impact the price, but it's not as easy as saying the market's panicking and the metal will

(reappear in the LME system)," said a source familiar with these types of deals.

TO WARRANT OR NOT TO WARRANT

The size of unreported copper stockpiles in China has been a source of mystery and confusion for years, particularly as the country's booming credit market has created pent-up demand for metal imports as collateral against loans.

That has bolstered prices and tightened supply. LME stocks are below 170,000 tonnes for the first time since 2008 and cash prices were as much as $100 higher than forward prices last month.

The threat of an influx of copper into LME warehouses almost wiped out the cash-to-three-month backwardation on the LME last week. Prices could fall back as low as $6,500 per tonne, Macquarie analysts said. Three-month prices closed at $6,690 per tonne on Wednesday.

On Wednesday, Macquarie analysts estimated that almost 300,000 tonnes of copper could be released from bonded storage in China by September. But they expect another 600,000 tonnes of copper to remain in place, with the allure of easy lending overcoming rising concerns about counterparty risk.

"Large and well-established importers have been seen to survive previous crackdowns and we expect they will again," Macquarie said.

The flow will be at its highest this month with some 110,000 tonnes of metal leaving bonded storage, easing to 90,000 in July and 90,000 tonnes over August and September.

The LME's electronic system for monitoring ownership of warrants, or receipt of ownership, make its network an attractive destination for banks and traders shaken by the probe. About 700 storage facilities operate in 38 locations in its global network, which stretches from the Detroit in the United States to Singapore.

But the LME has not been allowed to operate in China, and the costs of shipping metal outside of China and higher rent charged by LME-approved warehouses may offset some banks and traders' flight to perceived safety in the LME network.

At the same time, metal locked up in so-called repo deals, which give companies access to short-term credit in exchange for goods and a mainstay of China's copper market, would logically stay in China.

So far, there is no sign of the metal's showing up. LME stocks have fallen by 2,000 tonnes since Reuters first reported on the Qingdao crackdown on June 2.

Nervous traders are watching the daily data closely.

"Fundamentally, nothing's changed if you look at the stock numbers," said a London-based LME futures trader. "If Chinese metal appears on warrant, it's a different matter."

Rusal Indicates Bullish Trends in Aluminium Sector

Global aluminium producer Rusal indicated bullish trends in the light metal, mentioned several influential factors that have emerged in recent weeks. Major Four of them are depicted below:

Imbalance in Supply Demand

Aluminium Giant Rusal said that the global aluminium market was forecasted to meet a deficit of about 1.2million tonne in 2014 and an additional 985,000 tonnes in the next year. They also included that there would be expansion in several sites of Rusal. The company added that the beyond 2015, they were seeing a limited opportunities for adding capacity outside China as no new projects were in the drawing board for imminent development and the industry would remain under invested.

The supplier said that within China the demand in 2013 of about 25.5 million tonnes was roughly equal to the production and will grow about 10 percent in 2014. Estimated capacity addition of 2.4 million tonne introduced in the year 2014 had been counterbalanced by the closure of 2.1 million tonnes of capacity due to the uneconomic plant operations. Top of Form

Indonesian ore export ban

Rusal reported that the rally in nickel prices as a part of Indonesian ore export had caused investors to reconsider the effects of reduced Indonesian exports of bauxite in the light metal industry.  Above 4 million tonnes of bauxite was shipped to china from Indonesia each month in the year 2013, which made the basis of 10 million tonnes of aluminium production per annum i.e. about 20 percent of global production.  But it was just 4 million tonnes so far this year. Thus it is inevitable to seek any alternative source for lower grade, high costs of bauxite to maintain the production of alumina as same as previous years.  They are even considering that refineries in China may reserve the stocks for nine months’ metal supply.

Stock Trends

Rusal said that the stock trends of 2014 also supported a significant deficit in the market. LME stocks have decreased by more than 260,000 tonnes since the year start, lowest level in the last 13 months. The on-warrant level is at the lowest level in five years. Deliveries of aluminium from the bonded warehouses are down all over the world. But, Rusal believes that there is no demand for additional metal of warehouse in the market which is in deficit condition.

The company added that the stock trends have also changes considerable in the last 12 months with cancelled warrants, which represents 55 percent of all LME stocks. Rusal said that In Vlissingen and Detroit cancelled warrants represent 72% and 88% respectively, which shows a growing demand for aluminium above and beyond the  supplies from the smelters, to both the US and Europe

Price dynamics

Rusal said that the present trading activities for the light metal can be taken as a support for the aluminium sector in the short term basis. They explained that while taking a closer look at the trading in the last three day, the technical resistance was very strong of about US$ 1,850 per tonne and that is a part of long term done trading trend that was last testing in April at about $US$ 1,900 per tonne.

In the last few days the market was supporting twice at US$1,840 per tonne. During last Friday, as the prices moved through US$1,850 per tonne, stops were activated that initiated considerable trading volume, which covers both the previous short positions and new longs creation. This made the market to enter into a very constructive phase. What’s more, the availability of free float and zero premium warrants has decrease by 50 percent since the year start, about 730,000 tonnes. This resulted in a great impact on the liquidity of warrants for short term settlements.

In conclusion, Rusal, the aluminium giant believes that the combination both physical and constructive pricing factors see aluminium entering into  new bullish phase that could indicate prices tested at about US$ 1,900 per tonne this week and US$2,000/t  in the coming few months.

Freeport, Newmont CEOs in Indonesia in bid to break export tax deadlock

The chief executives of Freeport McMoRan Copper & Gold Inc and Newmont Mining Corp are both in Indonesia's capital, marking what might be a last-ditch effort to resolve a dispute over a mineral export tax before a new administration takes over in October.

Richard Adkerson, the CEO of U.S.-based Freeport, was in Jakarta again less than a week after talks with Indonesia's new chief economics minister failed to make a major breakthrough on an escalating export tax that has halted copper concentrate shipments since January. [ID:nL3N0OL1D8]

"Yes he is," Freeport spokeswoman Daisy Primayant said in a text message on Thursday, when asked whether Adkerson was back in Jakarta. She did not elaborate.

Newmont CEO Gary Goldberg, who was not involved in last week's talks, was in the capital to "demonstrate the company's seriousness in supporting the government's policy to increase domestic smelting", spokesman Omar Jabara said in an email.

He said Goldberg hopes to meet with "several government officials".

Indonesia's chief economics minister and billionaire businessman, Chairul Tanjung, is spearheading a new government push aimed at brokering a deal with foreign miners to restart copper concentrate exports that halted five months ago. [ID:nL3N0OJ12N]

Both Freeport and fellow U.S.-based copper and gold miner Newmont have previously argued they should be exempt from the tax, which kicks in at 25 percent and rises to 60 percent in the second half of 2016, before a total concentrate export ban in 2017. They say their current contracts prohibit any extra taxes.

The export tax is part of a government drive to force miners to build smelters and processing plants in Southeast Asia's largest economy, but a lack of progress in resolving the stalemate last week led to Newmont declaring force majeure.

Although government officials have said Freeport has agreed to pay the tax, with the percentage tied to progress made in smelter construction, the extension of the Arizona-based miner's contract beyond 2021 appears to now be a stumbling block.

While Freeport says it needs the certainty of a contract extension before investing more than $15 billion to turn its Grasberg complex into an underground mine when open-pit activities end after 2016, the outgoing government says it cannot legally do this.

Government officials have previously said Freeport can only renew their 2021 deal in 2019 at the earliest.

"The government at the moment has no right to extend Freeport's contract that ends in 2021," Tanjung told reporters on Thursday. "Freeport has asked for that extension but ... the current government doesn't have the right."

The government has consulted legal experts to see whether there is room for manoeuvre on the 2019 contract stipulation, and has proposed signing a legally binding MoU with Freeport to bypass the contract extension issue.

Indonesia holds a presidential election on July 9, with a new administration set to take office in October. Current President Susilo Bambang Yudhoyono has served the maximum two terms.