Why Chinese Aluminum prices up during this low-demand season?

Aluminum prices are now gathering up the rising momentum due mainly to falling inventories, as per Shanghai Metals Market.

It is now the low-demand season, but aluminum stock declines have not slowed from those recorded during the peak-demand period.

Last Thursday, total inventories in Shanghai, Wuxi, Hangzhou, and Nanhai were 798,000 tonnes, down 42,000 tonnes on a weekly basis, according to SMM data.

SMM attributes the decline mainly to the drop in market supply after production halts or suspension, in addition to growing consumption of aluminum liquid and the shipment to regions with new fabricating capacity, such as Shandong, Henan, Hebei, Hubei, etc.

Over 2 million-tonne aluminum capacity has been cut so far this year, with complete shutdowns reported in May and June. More than one third of idled capacity is scheduled to be brought back online, but full resumption at the 700,000-tonne capacities in idled lines is not expected until August at the earliest, SMM learns.

Part of this is due to the difficulty in securing sufficient funds to support large scale restarts, and many smelters continue to struggle in loss-making territory. Besides, tight liquidity is also slowing the commissioning of new capacity, SMM believes.

The SMM recent survey of 34 large aluminum smelters and traders in China reveals 71% of them are bullish towards the outlook, expecting spot aluminum prices in China to rise to 13,900-14,000 yuan ($2,254-2,270) per tonne this week. The growth both in trading volumes and positions in SHFE aluminum market and few arrivals in spot market explain their optimism, the survey shows.

Source: Shanghai Metals Market

2 Companies Begin Shipping Concentrate from Indonesia; Export Regulations Still in Place

Companies have struggled to export minerals from Indonesia since harsh regulations were put in place in January, creating a supply squeeze for nickel . However, two companies have now opted to start paying newly required export taxes in order to ship mineral concentrate.

Reuters reported Friday that Sebuku Iron Lateritic Ores (SILO) and Lumbung Mineral Sentosa have secured permits to ship iron ore , zinc and lead subject to a 20-percent export tax. Currently, that tax is slated to increase incrementally to 60 percent in the latter half of 2016. Indonesia implemented new rules banning the export of mineral concentrates in order to pressure miners to refine metals domestically.

SILO has now shipped 100,000 tonnes of iron ore concentrate, while Lumbung has sent 8,000 tonnes of lead and zinc concentrate out of the country, according to the news outlet. R Sukhyar, Indonesia’s coal10 and mineral director-general, stated, ”they finally wanted to pay it,” in reference to the tax.

Indonesia’s new mineral export regulations have also been making waves in the copper space as major miners Newmont Mining (NYSE:NEM) and Freeport-McMoRan Copper & Gold (NYSE:FCX) have so far been unable to come to an agreement about the rules with the Indonesian government. Reuters said in another Friday article that Newmont may even risk losing its mining license to a state-run miner as Indonesia is prepared to defend its case in international court.

To be sure, the news is important for resource investors to note. As well as being a leading supplier of iron ore and bauxite before the ban, Indonesia was the world’s number one nickel-exporting country, and a restart of shipments from the island nation would certainly affect the market. Since January, when Indonesia implemented its new laws, nickel prices have risen16 above $18,000 per metric ton, with China going so far as to get around the ban by purchasing ore with lower nickel and higher iron content labeled as “iron ore.”

In terms of whether the ban will actually be lifted, a Bloomberg article from July 9 suggests18 that Joko Widodo, Indonesia’s new, more market-friendly leader, may ease the harsh export rules. Mike Dragosits, senior commodity strategist at TD Securities in Toronto, told the publication, “that signals to us that he’ll probably relax the country’s ore export ban. His hand will basically be forced by the fact that the Indonesian economy has been suffering under this ore export ban regime.”

However, as Nickel Investing News has previously explored, the Indonesian ban is not the only factor at play for the metal. Russia’s Norilsk Nickel (MCX:GMKN) is the world’s single largest nickel producer, and it also influences the market. Kitco News reported last week that although increasing sanctions on Russia have yet to affect the metals producer, another increase in sanctions last week renewed supply fears on worries that Norilsk will eventually be affected.

For now, of course, ban has yet to be lifted, and any exports from Indonesia will remain subject to hefty tariffs. In that light, nickel investors may want to keep an eye on the situation in the island nation, as well as nickel-focused companies operating outside of Indonesia and Russia.

North American Nickel (TSXV:NAN) currently has two exploration projects: a nickel-copper-cobalt-PGMs project in Greenland and a copper-nickel-PGMs project in Ontario, while PolyMet Mining (TSX:POM,NYSEMKT:PLM) and Duluth Metals (TSX:DM) are both exploring for polymetallic deposits in Minnesota’s Duluth Complex. Polymet is advancing its wholly owned, advanced-stage NorthMet nickel-copper- precious metals project, while Duluth is focused on its Twin Metals copper-nickel-cobalt-platinum-palladium- gold - silver project.

Additionally, Balmoral Resources (TSX:BAR30) is assessing the base metal potential of its Grasset gold discovery in the Abitibi greenstone belt. Follow-up drill testing intersected a previously unknown occurrence of nickel-copper-PGMs mineralization grading 0.5-percent nickel, 0.1-percent copper, 0.33 grams per tonne palladium and 0.15 grams per tonne platinum.

Indonesia Ends the Six Month Metal Ore Export Ban

Indonesia has ended the six month ore export ban and has restarted the exports by taking new policy to improve the returns on the shipped out resources from the largest economy of Southeast Asia, said a mining ministry official.

Indonesia has imposed a ban on unprocessed metal ore exports in January and as a part of the policy to force the miners to construct domestic smelters for processing the minerals, they have levied an escalating tax on the mineral concentrate exports.

Disputes followed by the export ban stopped the monthly export of about $500 million minerals and concentrates. Before the imposition of the ban, Indonesia was the major exporter of nickel ore, iron ore and aluminium ore.

Coal and Minerals Director General, Sukhyar told that last week ships with iron ore, zinc, and lead concentrate left the nations amid the disputes, after two companies agreed to pay a 20 percent export tax. The two firms are Sebuku Iron Lateritic Ores (SILO) and Lumbung Mineral Sentosa.

SILO has shipped about 100,000 tonnes of iron ore concentrate where as Lumbung has shipped about 8,000 tonnes of lead and zinc concentrate. Sukhyar added by referring to the escalating tax that finally the companies wanted to pay it. The export tax has even made a legal dispute with the U.S miner Newmont Mining Corp.

SILO anticipated to ship about 8 million tonnes of iron ore concentrates per year where as Lumbung would export about 29,000 tonnes annually. The two companies are exporting the ores to China.

What are the factors to drive base metals this week?

A series of economic data will be due this week, and with strong speculative activities, base metals prices will each continue down recent trendlines, as per major Chinese analysts.

Analysis of Major Macro News in China
The National Bureau of Statistics (NBS) shows that China’s GDP grew at an annualized 7.4% in 1H, as Q2 growth accelerated to 7.5% (annualized), said Shanghai Metals Market.

China has undertaken small stimulus measures – including infrastructure investments and adjustments to bank lending ratios – leading to June’s rise in fixed-asset investment.

Investment contributed less than 3.6 percentage points to H1 growth, below the 4.1 percentage points from consumption. But, current growth remains heavily dependent on government-driven consumption, which has served to counter slides in manufacturing and real estate, but at the price of a spike in lending. New lending in June outpaced the previous three months.

China will maintain a pro-growth posture into 2H. A series of measures are expected to expand the money supply – including tax cuts and increased capital lending – to counter a steep drop in forex receipts. 

The PBOC is also likely to cut deposit reserve ratios for all financial institutions after a recent targeted cut. Nevertheless, China’s economy continues to face pressure from the lack of domestic demand and a sluggish real estate sector.

Aluminum contango sinks to lowest in 18 months on dwindling stocks

Aluminum's contango has fallen to 18-month lows amid dwindling exchange stocks, the latest in a recent series of bouts of volatility that have reignited a years-long debate about how tight the market really is.

The cash price on the London Metal Exchange was at a discount of $16.75 per tonne to three-month forward prices on Monday, more than half the size of the spread than a month ago and its smallest since December 2012.

The sudden narrowing was the third time spreads have tightened since April when spread volatility suddenly returned after a nine-month absence.

The aluminum market has been in a marked contango for at least the past five years, giving traders the opportunity to store vast stocks of the metal while it accrues value and sell it forward at a profit in so-called financing deals.

There is little sign that a prolonged backwardation, with cash prices trading at a premium over forward prices, will materialize any time soon, particularly while the LME stocks remain near record highs and inventory is locked in financing deals outside of the market.

Even so, the reasons behind the narrowing contango have polarized the market while LME stockpiles remain near all-time highs.

LME stocks have slumped 10 percent this year to 4.94 million tonnes on Monday, their lowest in almost two years, but that is still close to record highs and historically very high.

Some physical traders say it is the latest sign yet that smelter cuts due to weak LME prices have started to pinch supplies of fresh nearby production while endusers have been buying on a hand-to-mouth basis.

But others say those vast stockpiles continue to distort the real supply-and-demand picture.

"Aluminum is massively skewed by the slug of inventory hedged on or using the LME. It's not as tight as the spreads look," said Standard Bank analyst Leon Westgate.

Traders taking delivery of the metal leaving the warehouses are putting a big portion of it into new financing deals in facilities outside of the LME network where storage costs less, traders said.

"We've got very unusual circumstances: higher cash prices, tighter spreads and higher premiums," said a U.S. trader.

RETURN OF VOLATILITY

The sudden volatility is also significant after nine months of a steady forward curve. The cash-to-three-month contango remained pretty steady in a $40 to $50 range between July last year and April this year.

Analysts and traders expect the fluctuations to stay for now.

While the reason for their sudden return was not immediately clear, it followed one of the most critical periods for the LME in its 137-year history and for commodities trading.

In July last year, the exchange announced the most extensive overhaul of its warehousing network aimed at placating consumers who blamed the LME's policy for logjams that had inflated physical aluminum prices.

In the United States, physical premiums paid on top of the LME benchmark for delivery have soared to all-time highs.

The rule changes that would have increased the rate at which warehouses would deliver metal out were due to come into effect on April 1, but measures have been delayed due to a legal challenge from Rusal.

Renewed swings in spreads also come after a steady retreat by Wall Street banks, including Morgan Stanley and JPMorgan Chase & Co, from commodities trading due to regulatory scrutiny and weaker profit margins.

"Quite why was it benign for such a long period of time isn't clear, though what is obvious now is that there's been a marked change in behavior," said Westgate.

The New Scariest Chart In America

For the last few years, the 'scariest' chart for Europeans has been the unending surge in youth unemployment. However, amid all the sound and fury of mainstream US media discussions of the 'recovery' in America and the President's employment track record, Constantin Gurdgiev notes another 'scariest chart of the US recovery' that remains in full 'crisis mode'...

The Duration of Unemployment In The US...

True Economics blog

Chinese commodity financing scam dents copper’s prospects

Copper prices on the London Metal Exchange have dropped over five per cent since the beginning of the year to $6,987 (₹4.22 lakh) a tonne. A major reason for this fall is the drop in demand after a scandal over financing of commodities broke out in China. Data on Chinese copper imports show sharp drop in consumption.

The scam came to light a couple of months ago and it has seen copper shipments to China drop drastically. In May, copper imports declined 16 per cent to 3,80,000 tonnes from April and last month they slipped further to 3,50,000 tonnes.

Copper prices could come under more pressure after Citigroup Inc Chief Financial Officer John Gerspach said, during the weekend, that the bank has extended $280 million (₹1,692.31 crore) as loan to non-Chinese subsidiaries of large multi-nationals at two Chinese ports, Qingdao and Penglai.

The problems have cropped up in the metals market after Chinese authorities said they were probing a commodity trading house, Decheng Mining, charged with securing loans worth $435 million (₹26,291 crore) after pledging three times over the same metal stocks in Qingdao port. The trading house has also done the same thing with aluminium.

Chinese officials suspect that some 3,000 tonnes of copper and one lakh tonnes of aluminium could have been offered as collateral several times to obtain loans.

Bloomberg reported that local authorities in China were checking metal inventories that included 1.94 lakh tonnes of alumina and 62,000 tonnes of aluminium besides copper.

At least 18 banks have lent a total of 14.8 billion yuan (₹14,400 crore) to Decheng Mining owner Chen Jihong, a Singapore national. Other banks aren’t revealing their exposure to commodity financing in China and there are fears that there could be more than one claimant for the pledged stocks.

South Africa-based Standard Bank Group Ltd has, on its part, begun investigations into potential irregularities with metals in bonded warehouses at Qingdao port.

The scandal has broken when the metals market looked to gain after copper slumped to a four-year low in March in view of China’s slowing economy. Banks and trade fear that the scandal could be deeper than initially feared.

China’s move to tighten extending credit to corporate firms is seen the reason for such a scandal. This led to commodity financing, wherein companies pledged their stocks of raw material and finished products as collateral to get loans, and rise of private lenders. In case of any default, the lenders could sell these stocks and recover their loans.

Minsheng Bank, one of the lenders, has said that its collateral ratio for the loans is 55 per cent. This means that if a borrower has offered collateral for, say, ₹1,000, the bank has given ₹550 as loan.

The scandal has resulted in liquidity problems since banks have tightened their credit norms. This can lead to problems in the market and even lead to selling pressure – a reason for copper’s struggle. Some companies which had held these inventories only for obtaining credit have begun to offload them in the market.

International lenders have cut their exposure in China and they are increasing their scrutiny on their clients from the communist nation.

The scandal has also reduced the arbitrage opportunities between the Shanghai Futures Exchange and the London Metal Exchange with the premium that Shanghai enjoyed dropping rapidly. Players in the metal market took advantage of the Shanghai premium by selling copper on the Chinese bourse and buying it on the London exchange.

But a section of trade now sees reverse arbitrage, where investors can sell on the London exchange and buy from Shanghai.

For India, this scandal will ensure lower copper prices. Firms producing copper here fix the price based on the previous fortnight on the London Metal Exchange. With prices under pressure, it is likely that the metal used for electrical and construction purposes may not see much of a rise for now.