Network Metals LLC

2009-09-15T09:52:00.001-07:00

As we first discussed last week with the potential for the imposition of tariffs on imported steel pipes and other steel products (much of which comes from China), the idea of a trade war has now become mainstream news with President Obama’s decision to impose import tariffs on Chinese rubber tires. The Wall Street Journal is calling Obama the first protectionist president since Hoover (and this could prove to be true), but our feeling is that China is really the party driving the change. In the past we have referred to China as the ‘furnace of the world’; now that it is taking significant steps out of that mold (and is in the driver’s seat), the rest of the world has no choice but to adjust. Obama may only regret picking a fight when the next T-bill auction goes “no bid” from China.

2009-09-14T11:28:00.001-07:00

With LME copper hovering just under $3.00 for the last couple of weeks, we are hearing from all the usual outspoken sources that the bulls are prevailing with respect to copper’s near-term outlook. However, it is worth noting that in spite of the tenuousness of copper’s recent rise (or perhaps because of it), LME inventories have been consistently rising since early July. Right now these stocks have risen to just under 300,000 metric tons; this is not enough in terms of volume (LME volume is between 1 to 5 million metric tons daily) to cause immediate concern. However, we will be keeping a keen eye on inventory levels as things continue to sort out in the equity and commodity markets.

2009-09-11T10:07:00.001-07:00

On Wednesday, the US Commerce Department took the first steps toward imposing import tariffs on steel pipe from China. The tariffs will range as high as 31%, but the average will still be around 21.3%. We usually talk about Chinese export rebates as a good way to look at China’s attitude toward its domestic production, but the same can be said for this measure being considered by the US. This is quite a protective measure being put forth, and we ultimately feel it is a good thing for US manufacturing, which has seen some tough times over the last year or so. This goes right in line with the numbers coming out of China: steel pipe imports into the US from China have seen an increase of over 200% since 2006, and this measure, if instituted, would put a significant dent in that volume for next year.

2009-09-10T10:37:00.000-07:00

With lead and zinc prices rising on the LME and looking like they will continue up for the time being, talk of price participation is reemerging from lead/zinc smelters who are grappling with miners asking for higher premiums on concentrates. There have been some recent articles on Chinese smelters asking for yearly contracts for concentrates to include price participation clauses. This makes sense, from their perspective, given the volatility of the LME market over the past several months. However, it is unclear how receptive miners will be to these requests, given that this is the first time in a year that they have seen consistently buoyed base metals prices. We do not expect them to want to share in the current upside until the prices stabilize at least at current levels.

2009-09-09T10:09:00.001-07:00

Lately on CNBC and some financial websites, rare earth metals and how they relate to China have become the hip topic of conversation. We have been talking about this for a while, but the news continues to emerge ever day and Chinese involvement in the sector is indeed a crucial factor in understanding how the rare earth market will unfold over the next several years (given their use in everything from hybrid cars to laptops to other high-technology developments). Today we have word out of Australia that a Chinese-owned group plans to take a further 25% stake in Arafura Resources (ASX:ARU), an Australia rare earth metals exploration and production company. Arafura has an enormous land package in Australia, and the Chinese have expressed even more interest than usual in Arafura given its close proximity to China (as opposed to the Canadian rare earth producers and exploration companies). We will keep you apprised of any further developments in this story and the sector in general, as we expect the Chinese interest in rare earths to grow exponentially.

2009-09-08T15:15:00.000-07:00

Going along with what we have recently been saying about increasing Chinese demand for raw material metals, the news out of China today that Jinchuan Group will expand production for nonferrous metals by as much as one million metric tons by 2015 comes as no surprise to us. We have indeed been seeing more and more Chinese investment into Canadian nickel companies, as the country looks for ways to satiate its economy’s overwhelming hunger for steel ingredients, and Jinchuan’s increased production will provide more much-needed domestic nickel capacity.

2009-09-02T13:30:00.000-07:00

For the last couple of years we have been harping on the fact that as China moves further along toward producing more of the world’s finished products, it has gone from being a net exporter of base metals and other products to a net importer. Far from being the furnace of the world, China is now an importer of copper and aluminum, and it looks like molybdenum is the next metal to go this route. We expect the price of moly to continue to rise, as consumers have exhausted their stockpiles and are now rebuilding them. There is rampant speculation that the Chinese will also begin stockpiling moly as their steel furnaces begin to pick up toward capacity, and if this happens we will continue to see a turbulent market for moly on top of already rising prices.

2009-09-01T14:06:00.000-07:00

Lately we have been getting significantly more inquiries for raw materials from the steel industry, most notably requests for ferrosilicon. As the numbers continue to come out in the global markets, this appears to be the case for most of the rest of the world. We are hearing that European ferrosilicon prices have jumped dramatically, up 5% on the week - from around $1,125 to as much as $1,500 for delivered material. The price is not the only indicator of increased interest, however: we are seeing and hearing about many more settled contracts for 4Q09 delivered material, and with the traditional August slowdown still relevant for this year, we should start to see more furnaces firing up as these orders are filled.

2009-08-31T13:18:00.000-07:00

With ‘green’ technology part of the permanent lexicon of the global economy, we are now hearing more and more about rare earth metals and their relationship to renewable energy sources. A good example of this is the neodymium and lanthanum, used in hybrid cars for the vehicles’ engine magnets and batteries.

Again, this highlights our long-held belief that the only country well-positioned for the impending increase in rare earth metals demand is China, and that not only are they securing rare earth assets in their own country but also around the world (especially in Canada). There are some ways to play rare earth metals in the Canadian equity markets, namely Avalon Rare Metals (TSX:AVL) and Commerce Resources (TSX:CCE.V) (not yet in production but has enormous blue sky potential for tantalum and niobium); as the Chinese move to secure more global resources we fully expect more companies with rare earth potential to focus on these resources. Please contact us for more information on the rare earth space if you have any questions.

2009-08-20T13:18:00.000-07:00

Vladimir Putin yesterday signed back into law a progressive export duty on Russian nickel, another reflection of how much things have recently turned around for the nickel industry. This doesn’t necessarily indicate that nickel’s long-term future is becoming more secure, but the fact that LME nickel futures are around $20,000 per metric ton again at least suggests that governments will again begin to take a piece of exports similar to what they were taking in 2008.

2009-08-18T13:16:00.000-07:00

Disregarding for the moment yesterday’s dip, things have recently been turning positive for base metals, and nickel is seeing perhaps the most significant gains as LME futures approach $20,000 per metric ton. Manufacturing data is again climbing, and all of these signs are positive for the base metals. However, perhaps the biggest sign of long-term positivity for nickel is that small- to mid-tier mining companies are beginning to bring their idled production capacities back online. Liberty Mines (TSX:LBE) is only the latest company to do so, planning to restart its secondary Redstone nickel mine at the beginning of next week. We are still skeptical about the long-term viability of a recovery in the near-term, but more and more mining projects coming back into production will certainly help to convince the market that demand could continue to rise.

2009-08-13T13:15:00.000-07:00

Usually in July, the automobile industry shuts down for two weeks, but this summer such is not the case. Things were pretty bad in April and May, when GM and Chrysler were completely shut down, but now demand is extremely strong. Secondary aluminum producers are putting out 12-13 million pounds of alloy ingot this month (capacity 20 million), which is a big jump from 8 million pounds 60 days ago. Secondary aluminum smelters are desperately trying to get long on aluminum scrap after getting caught short during the run, as companies like Aleris and J.L. French (Ford) are revving up production with automakers’ pick-up in production.

2009-08-12T13:10:00.000-07:00

Silicon prices have remained quite steady throughout the global “correction” as compared to other ferroalloys and ores. The price has basically held above $1.00 per lb., which is probably more of a credit to the domestic supplier price discipline so as not to attract imports as opposed to steady demand. The auto sector is coming back to life, and we are hearing that 2010 contracts are being booked in the neighborhood of the $1.00 per pound level. Those customers that are waiting to buy in the spot market, and those customers that are not credit-solid will likely experience a decent price spike in 2010, when most suppliers will claim to be “sold out”.

2009-08-10T12:41:00.000-07:00

Some recent articles out of China and our Chinese contacts are telling us that there was a particular emphasis on the part of companies and private individuals within China to stockpile metals during the first half of this year. Worth noting here is that not all the stockpile purchases were done by the government, as is commonly thought.

As the credit gets tighter within China, the stockpiling should stop. This means that a good portion of the first half non-government metal purchases that we thought was consumed was really stockpiled. Therefore the overhang of this metal and the government stockpiles on the Chinese market should cap physical market tightness. This begs the questions: are the current market rallies justified by real consumption?

2009-08-06T11:40:00.000-07:00

All the Cash for Clunkers program did was accelerate the inevitable – our thinking right now is that it will be just a blip on the screen. The folks in the mills think that the entire program just bunched up sales of new cars and scrapping of cars from the past 3 months and the next 3 months. Those who were in the market just took advantage of the program, which didn't generate any new fresh sales.

2009-08-05T12:36:00.000-07:00

Despite the current environment of high and rising base metals prices, we are still seeing some bearish signals from certain elements of the metals world, especially in aluminum. Noranda’s CEO Kip Smith said yesterday that he sees the oversupply situation still intact, and that we should continue to see high inventory levels over the second half of this year. With increasing aluminum capacity coming back online in China (looking to quickly recreate its 2008 success in creating jobs), if true demand doesn’t pick up we could still see oversupply and falling prices. The auto industry looks like it could get a jump with Cash For Clunkers, but it’s still not clear whether or not any of the created demand will last. Until then, we are still not entirely comfortable with the idea of returning to a truly balanced market in aluminum yet.

2009-08-03T09:53:00.001-07:00

We are seeing gold and copper being strongly affected by the weakening dollar today, as we saw beginning to happen last week. As commodity prices jump, last week the European Union levied a 24% anti-dumping duty on China's steel and wire rod for five years. This follows the temporary duties instituted in February 2009, following claims that Chinese producers were dumping product on European markets. As we see anti-dumping measures emerge again and copper consumption begin to pick up, we can also expect Chinese manufacturing to rise (today’s numbers revealed that Chinese manufacturing expanded again in July), signs that things could be turning around.

2009-07-28T11:33:00.000-07:00

With yesterday’s note about Chinese steel demand in mind, we are hearing from our Chinese suppliers that prices are starting to pick up there, and that there is more of an overall bullish feel to the metals markets. Ultimately we expect that this sentiment will be reflected in the numbers in our bimonthly reports coming up shortly. With LME prices moving up, and raw material prices on the way up as well, it’s hard to determine where the equilibrium is. One thing is for sure: commodity prices and even equity prices can take on a bullish persona while fundamentals still lag. We will keep you posted.

2009-07-27T09:30:00.000-07:00

Today it is being reported that China has become a net importer of steel again, the first time since 2005. Overall imports of steel into China rose 59% to 6.6 million metric tons and exports fell 23%; some experts are attributing this rise to the success of China’s stimulus package, which has dramatically increased demand for steel over the past few months. Information from our sources in China tells us a similar story, as we believe Chinese steel production is rising rapidly (more than 90%) and could approach capacity. The steel production increase in China is a good example of a government stimulus working properly: the Chinese money is not going to help only the largest companies, but the small to mid-size steel producers as well. The same cannot be said of small to mid-size American companies with the American stimulus package.

2009-07-22T07:58:00.000-07:00

We saw this on Reuters today: “Analysts estimate the production of one million cars in the United States would need about 150,000 tons of aluminum, while 1.5 million cars would need 225,000 tons. Booming car sales in top aluminum consumer China form part of the equation: car sales in China rose an annual 47.7 percent to 872,900 units in June as government stimulus boosted demand.” This means that in order for just half of the current LME stocks to be consumed, the Global Auto industry would have to produce an additional 15 million cars! So please stop believing the world of analysts that say the increase in auto production is spurring the price of aluminum. Prices for metals are now being driven by speculation and a weak dollar- not demand.

2009-07-21T07:56:00.000-07:00

Today there are several reports out spelling out the details of something that we have been hearing more of lately: private metal stockpiles in China, in this instance up to 100,000 metric tons of lead, could potentially hit the market this month. Lead production in China, which produces up to 1/3 of all global lead production, is up 20% this year on current higher prices. Under normal circumstances stockpiles of lead would signal a bearish picture, but with the shift of auto production from West to East we are not yet sure this is a bad sign. Like so much of the manufacturing base in the US, we have yet to see what this country, or China for that matter, will look like with an approximate 5 million car “location” shift in auto manufacturing.

2009-07-13T12:19:00.000-07:00

This morning diecaster J.L. French Automotive Castings filed for Chapter 11 bankruptcy, although the company has stated that no production will be impeded and business will continue as usual. J.L. French is a big supplier to the Ford Motor Company (NYSE:F), which was supposed to be the only beacon of hope in the US automobile sector during the current downturn. But this shows us that things have not settled at all in the industry, and we expect tougher times ahead with continuing news like this.

2009-07-09T12:17:00.000-07:00

We have noticed a lot of the chatter about the height of nickel stockpiles lately, and if they remain that way it seems like ultimately prices will have to come down. As we have been saying recently, the looming strike by unionized workers at the Vale plant in Sudbury, Ontario is likely already priced in to nickel prices, and sellers are hovering, waiting for a chance to sell the rally at the strike announcement. The workers’ rejection of Vale’s offer only heightens the likelihood of a strike, and still nickel prices are not rising like one might think. This seems to us to be a case of “buy the rumor, sell the news”. By the same token, without a significant recovery in the stainless steel market we don’t see how nickel prices can be supported at these levels anyway, so we are probably due for a further fall.

2009-07-08T12:15:00.000-07:00

The Chinese steel mills today locked in iron ore prices with the identical 33% cut that the remaining Asian steel producers previously decided on – however, these prices will be locked on for only six months for the Chinese, instead of a year. In what seem to be an event directly correlated with the contract settlement, the Chinese government has detained Rio Tinto’s (NYSE:RTP) iron ore negotiator, continuing the negative relations between China and Rio that have been going on for several months.

2009-07-07T09:24:00.000-07:00

The aluminum scrap sector is uncharacteristically busy these days, when the usual summer maintenance shut downs are often in effect. The reason for the activity is that this year Chrysler, Honda and Ford US plants are all operating, and their suppliers are building inventory in anticipation of continuous growth. However, similar to the steel business, which is also experiencing an inventory build, the positive vibes from increased activity will only go as far as actual consumer demand. Somewhere along the line, someone has to buy the products that the steel and auto industries are offering.

2009-07-01T10:27:00.000-07:00

We’ve been getting some inquiries about possible positive signs for the auto industry, and whether a rise in steel and aluminum demand will come about in conjunction with a tangible recovery there. On our end, business is still pretty bad. The auto supply manufacturers tell me that they have not shown any real improvement in business. In fact, almost every week there is a new Chapter 11 filing in that sector. Ultimately we need to separate the car sales figures, which are probably just sales of existing inventory, with the raw material ordering (which would signal new demand). Based on what we are seeing from the raw materials side, there is very little to get excited
about. As far as steel output restarts, we still believe it is restocking and they will be waiting for customers to order. Is the market better than in Q1? Yes, but only slightly.

2009-06-30T12:51:00.000-07:00

The numbers out of China’s State Reserves Bureau yesterday seem to cut both ways. On the one hand, the amount of metal bought (especially copper at 235,000 tons) seems much lower than many analysts felt were accurate, and leads us to believe that there may have been actual consumer demand if the numbers are correct. On the other hand, not only are numbers like these often questionable out of China, but the fact that the copper market seemed relatively unaffected by the news indicates that we may not have heard the last of this issue yet.

2009-06-29T10:00:00.000-07:00

“The U.S. and the European Union raised complaints this week at the World Trade Organization over China's export restraints on raw materials” (Wall Street Journal 6/26), contending that China is exercising ‘illegal’ control over certain raw material exports used by US steel, aluminum and chemical companies. This might be the most ridiculous use of government energy we’ve seen, and a perfect example of why businessmen ought to run countries and not lawyers.

While it is possible to consider that, in a few years, the restriction of strategic metals (mostly rare earths) for export by China to the Western world may take place, at this time (pre- and post-recession) most of the metals listed are freely available. In fact, in real life the Chinese are using export rebates to encourage their export markets. Granted, the rebates apply to the semi-finished products and not these raw form metals, but that is their prerogative in order to encourage use of labor and value-added.

But perhaps the most confusing issue is why the USA would press forward with these allegations, while at the same time imposing 100% import duties on silicon and magnesium from China. Furthermore, if the USA and the EU were really so concerned, they would reverse their anti-mining policies and develop the resources that they already own.

2009-06-25T10:09:00.000-07:00

Interesting news from Nyrstar (EBR:NYR) - the world’s largest zinc smelter- has announced plans to expand into mining to secure raw materials supplies for their smelters. As we have been harping on for a while, the way to play the metals & mining equity space is to be own the miners, not the smelters. Own the raw materials - not the consumers of the raw materials.

2009-06-24T12:46:00.000-07:00

We can see the copper equity/commodity correlation now starting to separate. Up until now the futures price of copper and the copper equities, i.e. NYSE:FCX, have been tightly linked. However, now the weak fundamentals are kicking in to deflate an over-done copper price, as we have recently been talking about. At the same time, many of the money manager clients we have spoken with over the past two months have been looking to get into the copper story. Therefore we believe that the dips in the copper equities will be shallow and brief - scale down buying of the equities is our suggestion.

2009-06-22T12:58:00.000-07:00

Things are slowing down in China, and now the base metals are following suit. On word that demand is falling, copper prices are down big in the last two weeks and LME 3-month prices are back below $5,000 per metric ton. Of course, as we have been saying for some time, there is very little reason to believe that real demand, Chinese or otherwise, was truly portrayed in the copper prices of the past two months. With the question of true Chinese growth in mind, we would not be surprised to see copper continue to fall over the next couple of weeks at least.

2009-06-19T12:59:00.000-07:00

Things are starting to brew in the physical zinc business in China. We are seeing an increase in inquires from traders for zinc metal for delivery to Chinese ports. In addition, Chinese smelters are now charging higher treatment charges to mines to process their concentrates. Treatment charges were $80/mt in April and they are now being quoted at $130/mt. As we have discussed in the past, global zinc production was cut back dramatically when prices collapsed end 2008. While other LME metal prices may be ‘over-cooked’, zinc has steady fundamentals. We will keep you closely advised.

2009-06-15T13:01:00.000-07:00

The Indian central government today said that it is planning to impose a safe guard duty of up to 35% on some aluminum products for the next years. This is a further and more definitive move to protect the domestic Indian aluminum industry from Chinese dumping. As a result, we think that this is another bad sign for USA manufacturers. It will just force the Chinese to push harder for exports to USA if they don't have the Indian market.

2009-06-12T08:01:00.000-07:00

Substitution alert? With the rise of nickel in the past few weeks on the LME, we are not surprised to see consequent price jumps in other stainless steel ingredients like manganese. In Shanghai, we hear directly from our contacts that manganese rose 2% over the past week; this is nowhere near nickel’s rise, which over the past month is more than 15%, but analytically it makes sense that nickel, one of stainless steel’s major components, would drive the price of manganese up. Of course, our fundamental understanding is that real demand for stainless steel has not yet picked up much, and we do not expect to see significant sustained price increases for its ingredients until it does.

2009-06-11T08:00:00.000-07:00

Once again, the numbers don’t tell the full story. Chinese copper imports are up dramatically for the fourth straight month; unfortunately the uninformed are using these statistics to paint an extremely bullish picture of Chinese copper demand. However, our take on these numbers is that the large trading companies that took advantage of the SHFE (Shanghai Futures Exchange) positive arbitrage over the LME during 1Q09 are now shipping material to cover their geographic short positions. Hence LME stocks will go down, and Shanghai stocks should rise. To reiterate, we don’t view this as an excessive amount of new copper demand from China, but rather just a shifting of metal units from the West to the East.

2009-06-10T12:42:00.000-07:00

Sumitomo (TYO:5405) gave word this morning that its San Cristobal mine in Bolivia will likely produce about 246,000 tons of zinc this year, up 41% from last year. This is, as far as we can tell, the first instance in more than a year that a significant zinc producer is visibly upping production to capacity; last year we saw some of the most significant cutbacks in global zinc production in recent memory. It may be tempting to view this as a positive long-term sign for zinc and steel, especially given recent pricing trends. However, increased production is often a response to more economic prices rather than real demand, especially at a site where ramping up is not particularly costly (as we understand is the case with San Cristobal). It is probably too early to say that this is a harbinger of a return of a large portion of idled zinc production capacity.

2009-06-09T12:44:00.000-07:00

Mini-mill producer Gerdau Ameristeel (NYSE:GNA) said late yesterday that it is suspending production at its Sayreville, NJ steel mill and closing its rolling mill in neighboring Perth Amboy. The company cited the obvious reduced demand as a result of the economic downturn, and may also close facilities in Sand Springs and Tampa. From our point of view, this could perhaps be the first sign of a rationalization to reduce overcapacity in the US steel industry. We’ve already seen large cutbacks in aluminum and copper fabrication facilities, so these moves in the steel industry seem a bit overdue.

2009-06-08T12:46:00.000-07:00

Steel scrap market: We spoke last week about how GM’s bankruptcy would ease suppliers’ concerns about getting paid promptly for materials. However, the closing of at least 12 domestic GM plants is going to have a more significant negative impact on scrap in the short term. Scrap coming out of stamping and manufacturing facilities is some of the cleanest scrap in the US, and these GM closures are really going to tighten up that market. For example, Nucor (NYSE:NUE) and SDI (NASDAQ:STLD) use scrap as their primary raw materials, and with less scrap being generated they are going to see higher prices for raw materials. However, Nucor and SDI have a distinct advantage over other mini-mills, since they have secured their scrap supply by purchasing the recycling companies David Joseph Company and OmniSource Corp. It's the smaller mills that will have to fight for scrap. We will be continuously updating you on the developments in the steel scrap market.

FYI, based on our direct conversations with Omni and DJJ, scrap is still very tight even before the GM shutdown due to lack of scrap generation during this recession. So far this year Omni's collection of ferrous scrap is down 45% and nonferrous down 30%.

2009-06-05T12:48:00.000-07:00

Unemployment data was out again today, and while it's not our bailiwick it is interesting to note that from our metals sector of life the consumer and service base in USA is still lagging. Warehouses that handled our material on a daily basis are now only open 4 days a week. Furthermore, we still see the Chinese customers preferring to purchase "dirtier" scrap that requires more labor processing. These are just a couple of the signals that we look for to support thoughts of a recovery.

2009-06-04T12:50:00.000-07:00

As we approach the end of a historic week with regard to the US industrial base with the GM news, perhaps we can conclude that the worst may be over and now that suppliers can be guaranteed payment under GM's DIP financing metal will start to flow. Who knows?

But perhaps on a more reflective basis, there was one development this week in the equity markets that is the most telling of all: the Dow replaced GM from its line up and inserted Cisco in its place. We may look back on this as confirmation of the end of the US manufacturing base, and the beginning of the era of the US information and service age. Just a thought!

2009-06-03T12:52:00.000-07:00

We are seeing nickel prices continuing to climb higher on the LME, which it has done now for the past couple of weeks. It is not economic yet, but continued higher nickel prices could eventually bring back the relevance of one of our most talked-about 2008 topics: nickel pig iron. During the base metals boom of the second and third quarters of 2008, nickel prices bounced so high that (mostly Chinese) producers of NPI, which has lower Ni content than refined nickel metal, began to ramp up production. Once nickel prices collapsed, NPI again became irrelevant and most producers shut down.

But with margins widening for Chinese nickel consumers (China is a net importer of nickel), NPI could become an attractive alternative again. We are still a long way from NPI prices kicking in, as our customers tell us nickel will have to be up around $25,000. But we believe that if nickel prices continue to rise over the next few months, nickel pig iron will again become an important component of the nickel industry. It is certainly something to keep your eye on, especially if the current base metals rally continues to hold.

2009-06-02T12:54:00.000-07:00

Worry still remains for auto parts suppliers, as the GM bankruptcy filing will expedite the closing or idling of 12 further US plants. The demand picture for the suppliers, who have already been struggling for some time, still looks bleak for the moment. But from our perspective, and at least from what we have hear from a number of our customers, the bankruptcy filing should ease concerns about getting paid by GM as well as other consumers in the auto industry. Many of these suppliers will likely revert back to payment terms, as they know that any order GM places is backed by the US government, and it will free up credit to get things flowing a little more constructively than they have been. Of course, this only takes us so far if true demand does not begin to pick up in the second half of 2009.

2009-06-01T12:56:00.000-07:00

There is a big disconnect developing between higher metal prices, spurred on by the weaker dollar, and the ever present fundamental weakness, which is the actual metals demand from steel mills and fabricators in the Western world. The fact that the equity markets are percolating only exaggerates the divide.

Here is how we see things playing out between now and year-end: continued fundamental weakness will persist, but commodity prices will start to pick up in the summer as (weak) dollar-based purchasing continues globally. Western purchasing managers will then react and start to increase their inventories. In effect, the price will become a fundamental. Metal and raw material prices will increase and then we will be faced with some interesting decisions: is the demand real or just an event of re-stocking? Only the continuous monitoring of purchasing behaviors by steel mills and fabricator will tell us the true story.

Stay tuned – we will have further commentary on this topic this afternoon.

2009-05-28T08:30:00.000-07:00

Chinese markets are closed for today and tomorrow; this gives us a chance to catch our breath after such a varied couple of months for China. The enormous buying of base metals, especially of copper, by the Chinese SRB has given rise to bullish sentiment regarding base metals. For now, we are not inclined to believe that such optimism and high prices are sustainable, and that the Chinese are beginning to sell off copper makes us think they believe they have found a high at which to sell. We expect more of that copper to drift into the general market as the next few weeks go by, and at the same time our Chinese customers and sources are reducing their outputs in response to overall less orders. As the Chinese head into their possible seasonal slowdown, we also expect copper prices to see a substantial drop.

2009-05-27T08:29:00.000-07:00

With steel prices still in the doldrums, news was worse than expected (but not altogether surprising) for iron ore contract settlements. Nippon Steel (TYO:5401) settled with Rio Tinto (LSE:RIO) on iron fines at a 33% drop in price, and lump settled at 44% below the previous contract price. We expect Vale (NYSE:VALE) and others to do better than Rio with Nippon, however, as Rio’s premium for specialty products has diminished with the declining steel market. Also we have not heard anything from Chinese mills yet, but we understand they are targeting a 45% drop for lump.

2009-05-26T08:28:00.000-07:00

The only buyer in the market has now turned seller: we are hearing and seeing today that the Chinese State Reserves Bureau has been selling off its imported copper into the Chinese markets, albeit quietly. After the SRB’s huge buying spree over the past few months, which we have been consistently talking about, this is really very bearish news all around. If the selling continues or increases in volume, prices will come down and the arbitrage opportunity for imports will disappear. At the risk of beating a dead horse, until we get some real demand from consumers, whether in China or outside, we just don’t see prices running away right now.

2009-05-21T08:27:00.000-07:00

This morning we are hearing about some pushback from Chinese aluminum smelters, who are asking for the Chinese government to institute anti-dumping measures to guard against foreign imports dominating the Chinese market. This is an interesting reaction from the Chinese processors, if only because they reacted so strongly to instituted anti-dumping measures by the US, Canada and India, but not without merit. As the margin between domestically produced and imported aluminum grew in China, imports into China went up, especially during the Chinese government’s buying spree. Chinese aluminum exports were down 81% year over year for January-April 2009, so it is easy to see why Chinese smelters want to reduce imports of
aluminum into China. As a result we expect to see some further maneuvering of a combination of Chinese import/export tariffs, energy subsidies and further reserves buying.

2009-05-20T08:25:00.000-07:00

It seems like every day, there is more bad news from the auto industry. On top of reporting an $87 million loss in March 2009, rumors are all over the place that Aleris is planning on shutting down its Coldwater, Michigan automotive alloy plant. Although much of the losses were due to non-recurring expenses related to the company’s recent Chapter 11 bankruptcy filing, a Coldwater shutdown would decrease future revenue even further from the $215 million it saw in March. We have been hearing from other suppliers that Aleris has laid off more than 2,400 workers so far this year; this is just another example of how negative our outlook overall is for both the auto parts suppliers and the auto industry as a whole.

2009-05-19T08:24:00.000-07:00

News out of Russia and some Middle Eastern countries today regarding aluminum smelters and falling costs is not necessarily good news - it’s basically a game of chicken between Western and Third World producers. Russian and Third World aluminum producers are lowering production costs while Western smelters (Alcoa (NYSE:AA), Century Aluminum (NASDAQ:CENX), Noranda) are suffering. As soon as most of these forward sales and forward hedges, booked last year, wind down, Western producers may be forced to cut production, leaving the eventual turnaround in aluminum pricing solely to the Third World smelters.

2009-05-18T08:23:00.000-07:00

As we’ve been saying over the past couple of months, things in China don’t seem to be pointing to any dramatic, nearby recovery. Besides the demand that the Chinese government is creating, there is very little dramatic increase in consumption of base metals and steel raw materials going on right now, and we would need to see some more action on the ground in order to change our opinion on that. But for now our sources have been confirming our suspicions: the Chinese government is the only entity creating any real demand at the moment.

2009-05-15T08:22:00.000-07:00

Earlier in the week we reported that the New York Hard Assets Metals and Mining show was in town, and we were there at various times throughout the two-day conference. Much like the PDAC conference in Toronto earlier this year, the Hard Assets show was a shadow of its former self. The show was considerably smaller, with fewer booths and a smaller overall space in the hotel. But there was also good news at the conference, as a number of Canadian and South American companies are approaching production, and in our opinion if gold continues to climb there will be some good bargains in the Canadian gold mining juniors.

Of note is that 90% of the companies that had booths were gold and silver miners. The smaller base metal producers are mostly shut down because they can only produce at prices well above current market levels. What this tells me is that when that magical time comes for a rebound in base metals prices the rally will be fierce because there will be a big gap between demand and supply (see our weekly report today regarding mining costs).

2009-05-14T08:21:00.000-07:00

One of our contacts in China yesterday gave us some information about titanium production and consumption in China worth noting. Titanium production out of China in April was up 40% year over year to 5,200 tons, but demand for our suppliers in Shaanxi Province has dropped dramatically. Over the past three months one supplier has seen about 50% of all usual orders cancelled. They also told us that in their area of Shaanxi, about half of all existing titanium factories have been idled due to the weak demand, and that at the moment they are just barely above water. This paints the actual demand picture well in the face of higher production, and provides more evidence that real recovery is not yet imminent.

2009-05-13T08:19:00.000-07:00

Another bankruptcy filing yesterday: this time Hayes Lemmerz International (NASDAQ:HAYZ) has filed for chapter 11 bankruptcy…again (this is the third time). Hayes Lemmerz is an aluminum and steel wheel manufacturer, and the company had been noting a strong lack of demand for the past year or so. With the plan for $5 billion to go to auto industry parts manufacturers, we hoped that more bankruptcy filings would be put on hold, but it doesn’t seem to be the case so far.

The news out of GM (NYSE:GM) yesterday that executives dumped their personal shares is certainly not going to help sentiment either. Demand is still very bad from our own customers, and the auto industry looks like it is not in for any significant recovery. This correction should continue to claim American automobile parts manufacturers for the time being.

2009-05-12T08:18:00.000-07:00

Yesterday we mentioned the details of the Chinese stimulus plan and how it relates to base metals. It really is only more of the same murky picture out of China, and a good example of why it’s so difficult to read Chinese smelting production. Basically China is looking to rationalize its smelting industry, with emphasis on restricting output from high energy-usage smelters (like those for copper, aluminum, lead and zinc). We will continue to investigate this situation with our Chinese contacts. However it is doubtful that these events will have any immediate effect on the supply/demand picture.

2009-05-11T08:17:00.000-07:00

Here we go again: with LME stockpiles falling throughout the last few weeks, we are starting to see numbers trickling in that tell us exactly where all the London copper and other base metals ended up during the base metals rally. Shanghai futures have fallen today, and London prices still look weak after taking losses on Friday; this is, in no small part, because of rising Chinese stockpiles. The Chinese State Reserves Board and other Chinese buyers have increased their reserves entirely without a significant rise in actual consumption, and as we have suggested for the last few weeks, we may see copper heading back down on its ‘W’ path fairly quickly.

***The New York Hard Assets Metals and Mining Conference is taking place today and tomorrow. We will have details and analysis of this event later on this week.

2009-05-08T08:15:00.000-07:00

Following up yesterday's bad news from Alcoa (NYSE:AA), we learn today that they have lowered their billet premium from 11 cents per pound to 8 ½ cents per pound. This will have a bottom line effect on the total dollar sales for Alcoa. Billet is produced by Alcoa at various smelter locations and is considered a value-added item above the typical smelter output of ingots, sow or T-bars, which carry no premium. Alcoa would have the benefit of making billet directly out of molten smelter metal and getting the usual 11-14 cent premium depending on market conditions. Billet is consumed by extruders who make specific aluminum shapes mostly for building and construction.

Due to poor demand, the premium for the billets - of which we hear they have plenty of stock - had dropped below the Alcoa cost of production, which they say was 11 ½ cents per pound. This is due to the extremely poor demand from the building and construction sectors, as witnessed by the recent Chapter 11 by Indalex and Chapter 7 by Signature Aluminum. Even yesterday Kaiser Aluminum (NASDAQ:KALU) announced further cutbacks at it Virginia facility, where it will focus solely on drive shaft and seamless tube products. The facility will also be temporarily shut down in July in response to the continued weak market conditions.

2009-05-07T08:14:00.000-07:00

Interesting and very telling news from Alcoa (NYSE:AA). The company has decided to “temporarily” shut down its Texarkana, TX aluminum rolling mill and transfer the work to its Lancaster, PA facility; it will lay off 250 workers. The word on the street is that this move will be for longer than 3-6 months, and that Alcoa is not expecting an improvement in the business climate any time soon.

The Texarkana plant produces aluminum sheet of various alloys that are related mostly to building and construction - these are higher end aluminum sheet products, but not as high quality as the aluminum sheet used for packaging. The alloy 5052 is used for highway signs and the alloy 3003 is used for tread plate or diamond plate often seen in building stairwells and entrances. The Lancaster plant makes mostly 3105 alloy which is a lower end sheet product and requires much less value added (increased profit!) for Alcoa.

2009-05-06T08:12:00.000-07:00

In a bid to further control Chinese imports into Australia, the Australian government is studying
the institution of anti-dumping measures against Chinese manufacturers of aluminum extrusions. The Chinese have recently lost this battle to the Canadian markets, and this could create further damage to their overall strategy of exporting the majority of Chinese finished materials. The Chinese are considering countermeasures to increase the export rebate to aluminum extrusion producers to 17% from the already historic highs of 15%.

This is another example of 1) not enough Chinese domestic demand to consume the output of extrusions, and 2) the Chinese government's methods for stimulating their economy at the expense of western world manufacturing operations. The US has in the past instituted import duties on steel products in order to protect domestic steel mills. There is a silent trade war brewing between China and the rest of the world, and the only thing that can calm the parties is an increase in Chinese domestic demand - which we are not yet seeing.

2009-05-05T08:11:00.000-07:00

Chinese imports of refined copper over the last three months have been at record levels as many private and government entities in China sought to increase their stockpiles. However, as the price of LME copper has climbed to $4500-$4600 per metric ton, Chinese importers are backing off, citing decreasing margins between domestically produced material and imported LME metal. We still believe that we are seeing two separate copper markets: one in Europe, where demand is extremely weak, and one in China where buying is based on an arbitrage game and not reflective of true demand. For now, demand out of Asia for European copper is still relatively strong, but we continue to expect a sharp decrease in demand as the Asian hoarding of copper comes to an end.

2009-05-04T08:09:00.000-07:00

Last week we saw further news out of Alcoa (NYSE:AA) that the company has completely disposed of its cast auto wheels business, after agreeing to sell its wire harness and electrical distribution business to Platinum Equity. This is more evidence to support what we have recently been saying about Alcoa: that the company is ridding itself of all downstream operations in order to complete its transformation into a pure mining/smelting company. Once the switch completely takes place, there is a lot of potential for the company to be scooped up by a mining major. Also, it’s hard to argue these days about getting out of the
auto business altogether.

***The LME is closed for its May holiday today…

2009-05-01T08:03:00.000-07:00

It is worth following up on rare earth metals again, and the continuing Chinese consolidation of most of the world’s rare earth metals reserves. We spoke at length about 95% of global rare earths production taking place in China, and that the Chinese were moving into North America to take advantage of much of the untapped reserves in Canada, among other places. But the Chinese are also moving to control most of Australia’s rare earth reserves as well. Lynas Corp (ASX:LYC) and Arafura Mining (ASX:ARU) were both looking for funding earlier last year (Goldman Sachs (NYSE:GS) pulled out of a potential financing of Lynas), and were consequently scooped up by state-owned Chinese metals and mining entities. Today China Nonferrous Mining Company took a majority stake in Lynas with $186 million, and took further steps toward consolidating the world supply of rare earth metals.

2009-04-30T09:02:00.000-07:00

Given the state of copper prices over the past few weeks, and what we have been saying regarding the sustainability of the rise, it should be no surprise that we are hearing from a number of copper producers that they are placing a lot of forward-sell hedges around the $4500 level. Though inventories have continued to drop over the past weeks and cancelled warrants are up (copper cancelled warrants are up to 20%), bearish signals from China (such as the treatment and refining charges we spoke of yesterday) indicate to us that we will see further bottoms for copper. With this in mind, it is useful to look at the Shanghai Futures Exchange copper stockpiles, which are up 27% in a week.

2009-04-29T09:01:00.000-07:00

News out of China yesterday and today says that treatment and refining charges for copper have dropped more than 30% over the past six weeks. Chinese smelters are charging less to process imported concentrates which in our view is meant make up for the "shortage" in scrap (see next paragraph). Increased demand for concentrates from Chinese smelters is just another way for Chinese smelters to pick up copper units that scrap could not fill. The Chinese do not want to import cathode because that takes the domestic labor element out of the equation, and importing scrap and concentrate allows more Chinese people to find work at the smelters.

Something that caught our eye in particular was that Chinese imports of scrap fell 39% in March, while at the same time imports of concentrate rose 11%. This validates our theory that the tightness in copper scrap was a matter of availability and not increased demand. Despite these superficially bullish signals, Chinese domestic demand is not picking up. If they were, there would be no need to incentivize the metal exports with rebates.

2009-04-28T08:59:00.000-07:00

***Follow-up:

Last week in our weekly piece we spoke about rare earth metals and China’s current dominance in that particular space. We also brought up the coming importance of Western miners and suppliers of rare earth metals, and this week we’re hearing more from industry people that confirms much of what we said. In particular people are focusing on ‘mine-to-market’ rare earth operations, in which all production from mining to fabrication is completed by one company. We mentioned a specific company emerging in this space called Molycorp, a private company spun off from Chevron (NYSE:CVX) which recently acquired Great Western Minerals Group (TSX:GWG.V); we’d like to reiterate Molycorp’s importance as it has been mentioned in several ensuing articles this week. As we said, these types of companies are going to be increasingly important to the rare earth metals space as demand rises, especially while upwards of 95% of rare earth metals production is still taking place in China.

2009-04-27T08:58:00.000-07:00

There is some rumbling today about the effect swine flu may have on copper demand, but ultimately it seems like an excuse to bring back down copper prices that soared over the past few weeks – copper is sharply down at the writing of this note. There was and is not enough actual demand present, in our view, to support the gains copper has seen recently, and the stronger dollar and worldwide worry about the speed of recovery should help to bring things down to a more sensible level. That being said, we are also hearing some Chinese interest in importing copper from the US, which would certainly boost prices again. But it is hard to tell whether or not it is just more stockpiling creating the interest; after all China, as we like to say, is a black box when it comes to disclosure.

2009-04-24T08:57:00.000-07:00

Many analysts are coming around to the same sentiment we have been harping on for the last few weeks. Earlier, people in the metals world began to agree with what we have been saying about Chinese buying, high copper prices and the chances that such gains would be sustained, but now most of the equity markets/technical analysts are referencing Chinese SRB selling and the effect it should have on copper prices.

We often say that in our experience, the Chinese SRB is one of the best entities at picking a bottom for metals prices, and it looks like the did a good job of it again. After buying huge amounts of copper over the past few months for its reserves (some say as much as 400,000 tons), SRB selling should help to bring prices back to a reasonable level. The huge gains in copper were not particularly reasonable to begin with, given the current
state of the world, and the relative weakness in copper this week should help drive prices down into next week (although copper saw gains today). We advised last week that this could be a typical case of ‘sell in May and go away’, and we are seeing more people saying that now; if this is any indication at all, copper prices and the base metals in general should see some significant correction.

2009-04-23T08:56:00.000-07:00

Century Aluminum (NASDAQ:CENX), a company we know well, is now considering further production cuts at its Hawesville smelter. One potline has already been taken down, reducing overall production by 52,000 tons per year, and another potline representing 50,000 tons more annual capacity could be taken offline as early as next month. We’d like to reiterate here that Century took out all of its hedges at the top of the market last year, and these production cuts will continue until we see some significant improvement in the aluminum price. For now, the price of aluminum is below Century’s production cost, and the company is going to have to work hard with its customers, creditors and suppliers to find an economic solution. At this point cutting production in the face of terrible demand for aluminum metal is the most logical solution for the company, and we suspect that further cuts will indeed be its best option.

2009-04-22T08:55:00.000-07:00

It seems to be more of the same today, as copper continues to fall and the other base metals mostly follow suit (although copper stabilized at the end of trading). Copper’s fall over the last three days has been its worst in ten weeks, and if overall sentiment is any indication we will see more correction in the copper price. We are still seeing a lack of copper scrap contributing to overall copper demand, but the scrap shortage is, as we’ve said, due to a lack of production and not to an increase in consumption. Copper’s run over the last two months has raised the price dramatically and cosmetically reduced LME inventories, but the majority of the primary metal has not been consumed; we believe most analysts will come to agree that the overall fundamentals have not changed enough to signal a recovery. A Chinese official yesterday said that ‘overcapacity in the steel and automobile industries in China is one of the country’s biggest concerns’, and we suspect that it will take indicators like that to change before actual metals demand can pick up.

2009-04-21T08:54:00.000-07:00

We recently read a Jefferies report changing Reliance Steel (NYSE:RS) from ‘hold’ to ‘buy’. We tend to disagree with this, strictly based on market fundamentals that are pointing toward an influx of imported steel and aluminum products from China (as we have been talking about for the last month or so). The steel distributors in the States will face fierce competition from imports until the Chinese domestic markets substantially improve. The key indicator to watch will be the Chinese export rebate policy in the coming months.

2009-04-20T08:52:00.000-07:00

***BREAKING NEWS – we have learned that the Chinese SRB is now lending copper. They are delivery their recently purchased physical stockpiles to the Shanghai Futures Exchange and buying back the forwards, thereby earning the backwardation that currently exists. This would seem to mark an end to SRB copper buying for the time being.

More analysts and commentators are coming around to the conclusion about the current base metals run that more conservative analysts, ourselves included, have been espousing for the past few weeks. Copper is down sharply today on LME trading. While copper has been flying up the charts, from January up until and including last Friday, it is becoming clear that much of the buying has been from the Chinese for public and private reserves. This buying contributes to falling exchange inventories, but does not reflect real recovery or actual demand; that metal is still floating around somewhere unused, and is mostly in China now. Conventional technical analysis still reveals what some believe to be base metals strength, especially in copper and zinc, but even these analysts are now advocating waiting for a possible impending sell-off.

2009-04-17T08:52:00.000-07:00

After continuing to climb this week, we are starting to see signs of copper’s weakness creeping in. COMEX and LME prices have dropped in the last couple of days, and the stronger dollar is having at least some impact. But for now we are especially noticing copper stockpiles increasing around the globe, after buying over the last couple of months had made the stockpiles relatively neutral. Shanghai stockpiles have risen by 21% this week alone, and we are getting further reports of Chinese buying simply vanishing in some cases. This may prove to be the start of the next downturn in the copper W we are expecting.

2009-04-14T08:50:00.000-07:00

A flurry of news out of China today is supporting our various positions on the Chinese reserves purchasing and scrap shortages. Firstly, Hunan Nonferrous Metals Corp Ltd announced that it will boost its reserves by spending as much as $176 million as metal prices, aside from copper, continue their slumps. Also as we have already been talking about over the past couple of months, Scotia Bank today addressed the scrap shortage, brought on by significantly less global consumption, and how it is still driving up imports of copper metal into China, which is replacing the missing scrap. This will probably contribute to continued rising copper prices in the near-term, but we expect the correlation between equities and copper to give way to the actual fundamentals, which are not well supported in terms of supply and demand.

2009-04-13T08:49:00.000-07:00

We are seeing copper’s climb continue, and it looks as if it may approach $5000 per ton in the future if near-term trends are any indication. However we will continue to stick by our story that the demand picture does not bode well for the long-term fate of copper’s recent gains. We are looking at this as part of a larger “W” recovery time frame, and we believe that this year we might be able to apply the adage “sell in May and go away” for base metals. By the end of 3Q09 or even into 4Q09 we are optimistic that we will see more sustainable recovery due to actual demand, rather than continued speculation in the face of a lack of proper fundamentals. The LME is closed for Easter Monday today.

2009-04-08T08:47:00.000-07:00

***Many analysts are saying that Rio Tinto (LON:RIO) and Alcoa (NYSE:AA), among others, are inevitably going to have to institute further production cuts across the board, which is something we have been inclined to agree with over the past few weeks. The needs for continuing cuts only justifies the position that demand is just not there, and will not be for the near future. An independent study we saw yesterday said that copper should average $3,400 per metric ton in 2Q09 (its April 3 close was just over $4,300). Even still, copper is continuing its climb up the charts today and is approaching $2.00 per pound; however the fundamentals are just not there and three-month futures are beginning to fall off. Gold jumped up yesterday
with the shaky equities, and a further fall for copper is likely as more investors come around to what one analyst told us was a “foregone conclusion” – that the fundamentals for base metals and steel are still unsound, and do not justify the sustained climb that copper has recently seen.

***Reports out of Hunan Province in China suggest that aluminum smelters throughout the province have been ‘persuaded’ to restart idled furnaces in order to reach local GDP growth projections for 2009. The Chinese government will in turn help out the smelters with tax breaks and loan interest subsidies, which should keep them profitable in the short term. This amounts to a metals industry version of water torture for the rest of the world’s aluminum producers; it is really amazing what a little ‘persuasion’ from the Chinese government can do, and at the expense of the rest of the world…

***Please note that this will be the last newsletter this week due to the Easter and Passover holidays.

2009-04-07T08:46:00.000-07:00

After a day off trading yesterday, Shanghai copper followed copper’s rise by jumping 5% today. Analysts are talking about copper inventories in Shanghai and London, which have dropped on the month and year, and there have been larger reports of cancelled warrants, but no one really seems to think the buying is demand-driven. Fundamentals have not changed, and the Chinese buying for reserves does not constitute greater consumption – this is most likely continuing tightness from the scrap markets contributing to Chinese buying.

2009-04-06T08:45:00.000-07:00

Copper was strong last week, as it has been for the last couple of weeks, and the question for us has become this: “Why is copper flying in the face of the world’s general negativity?” We are inclined to believe that the weak fundamentals inherent in all the other metals still apply to copper, and that industrial consumption is not near where it needs to be for a proper recovery. Look at the recent price dips in Asian iron ore and further cutbacks in nickel production for continuing evidence of weak overall fundamentals in metals. This activity in copper may be a result of the tightness of scrap, as we discussed a few weeks ago, or it may simply bear further investigation. But for now, despite neutral LME inventories and rising prices, things do not seem as fundamentally sound for copper as the current buying flurry would make it seem.

2009-04-03T08:44:00.000-07:00

The uptick in copper prices over the last month or so seems rather tenuous given the total lack of demand we have seen in the copper markets. The unemployment numbers out today really only serve to highlight that negative news continues to come out despite the current rallies, and that real recovery has not taken hold. Chinese SRB buying is not true demand, and cannot continue to support current levels without some help from end users/consumers of copper. We do not expect the price to continue to reflect such positive sentiment without some tangible and substantial demand recovery.

2009-04-02T08:43:00.000-07:00

Reuters yesterday reported some positive signs from the European car markets, but these seem especially tenuous considering that the only car companies gaining in the stock market were heavily subsidized by their governments. On that note, the German government extended its program which gives new car buyers E2500 if their previous car is more than 9 years old. This does not seem like much of an indicator to us, especially during what we believe is a copper rally that is not sustainable given current demand issues. Most manufacturers still indicate that they believe US sales will continue to fall throughout this year.

2009-04-01T08:42:00.000-07:00

While President Obama seems to have indicated that bankruptcy is a possibility for GM and Chrysler, the real question for domestic auto parts manufactures is whether or not the UAW will continue to have a stranglehold on American car producers, and whether laws dictating American cars must be produced in America will remain in place over the long haul. If, say, GM and Chrysler were suddenly allowed to move production of certain fleets to other countries, US auto parts manufactures would have to adjust to becoming at least partial exporters. They would certainly have a technological advantage over foreign auto parts manufacturers, and would be able to sustain exporting their products, but it would take away the emphasis on Midwest locations for these companies. They might end up moving toward the coasts. But US auto
companies manufacturing certain fleets elsewhere, while still unlikely for the time being, is a situation that could emerge in the long term - if the archaic laws regarding the UAW and domestic production were to be changed or restructured.

There have been rumors floating around, resurrected from summer 2007, that BHP (NYSE:BHP) is considering taking over Alcoa (NYSE:AA). Obviously this would be huge news; we wouldn’t be surprised to see Alcoa sell off downstream business and just focus on mining and smelting.

2009-03-31T10:26:00.000-07:00

We’re still trying to get our hands around the events of yesterday and the weekend. Ultimately we’re not sure how the situation fits into the larger context of the money going to auto parts suppliers, whether GM and Chrysler end up filing for bankruptcy or not. Over the next few days we’ll be speaking with our customers who supply auto parts to the car companies, and will hopefully get a better grip on what these means for them and the metals they consume. Overall, to us this looks like the auto industry is taking one step backwards to eventually take two steps forward, but what that means to the metals markets can really not been determined yet.

2009-03-30T10:25:00.000-07:00

Chinese smelters are restarting 700,000 tons of aluminum capacity in response to high prices for domestically-produced aluminum, which are significantly higher than global prices. This is exactly what we have been on about for the last couple of months – it proves that you can’t judge the global aluminum market, or really any metals market, without considering the entirely separate level the Chinese are playing on. Through export rebates and energy subsidies, the Chinese are creating an uneven playing field for their domestic producers, to create as many domestic jobs as possible. The situation is comparing apples to oranges. It is not possible to get an accurate reading of global supply and demand when the Chinese will simply adjust their tax and cost policies to suit their producers.

It is also an insight that only comes from dealing directly with Chinese consumers and producers, as we do. With this in mind, it is our position that the only people this move really helps out in the long run are alumina producers.

2009-03-27T10:19:00.000-07:00

We have received more word out of China today that tells us that the Chinese government is moving the country’s economy back toward an export economy, and back to its old “furnace of the world” status. Yesterday China announced that it will introduce an export tax rebate of 13% for aluminum alloy profiles (for which exports have been dramatically down), a 13% rebate on copper pipe exports, another 13% rebate on nickel profiles and other metal products, and further rebates on over 3,000 textile products and other exports. China is moving back to its old economy of taking in raw materials, producing finished or semifinished products, and exporting them out of the country as such. This increasingly looks like the only way the country can presently sustain mass employment, which is the government’s main focus during the extended economic downturn.

2009-03-26T10:18:00.000-07:00

We have been hearing reports that China is planning on cutting the 20% export tax on ferrochrome and ferromanganese in 3Q09. As we have been talking about recently, the Chinese government is doing everything in its power to keep domestic smelters functioning and as many people employed as possible, and this potential decrease in the export tax for ferrous metals should help domestic smelters further. Steel production is down domestically in China and prices are low, so exporting the metals for steel production outside the country will keep the smelters functioning at least until domestic demand foe steel picks up to higher levels. Even still, Chinese ferroalloy output is expected to decline this year, according to Sinosteel, in line with the destruction of steel demand.

2009-03-25T10:17:00.000-07:00

Chinese reserve buying continues today as Central Henan Province has announced its intention to purchase 500,000 tons of aluminum for its reserves. Central Henan Province is China’s largest primary aluminum producer, and so far almost 40% of its smelters have ceased production during the aluminum downturn, which has been perhaps the worst out of all the base metals. But the Central Henan plan of bringing in aluminum reserves and possibly subsiding energy prices is in the same mold as most of the other Chinese government interventions into the sector. Since primary aluminum production is particularly energyintensive, the energy subsidies for aluminum smelters in the Henan province, already present, will carry special significance down the road as aluminum continues to suffer.

2009-03-24T10:16:00.000-07:00

Despite the current base metals rally, especially in copper, and yesterday’s rally in the equity markets, we are still seeing immense layoffs and production cuts. We talked yesterday about these cuts in copper, but the steel industry is in the same boat. Outokumpu Oyj (HEL:OUT1V), the Finnish stainless steel manufacturer, today announced ‘temporary’ layoffs of more than 1,500 of its workers as the slump in stainless demand continues to take a toll on the company’s bottom line. Outokumpu is also cutting ferrochrome output, and left all of these changes indefinitely in place. It is still unclear as of now, but it is our inclination to believe that the current metals rally is not sustainable given the underlying fundamentals.

2009-03-23T10:15:00.000-07:00

Despite the moderate gains in base metals last week, we are still seeing bearish signs, especially from copper producers. Apart from the cutbacks and layoffs of last week, today Asarco LLC announced that it is planning to shut its copper smelter for six weeks. The company will also implement 32-hour workweeks for a number of its employees, and these changes will be instituted immediately and with no immediate end in sight for the reduced hours. These are not news items that inspire much confidence in demand for copper and other base metals; for this reason the current uptick in copper prices does not seem sustainable. Continuing production cuts are a good indicator that these companies do not see demand increasing, and the current stockpiles will need to come down further before production can accelerate. Last Friday alone copper stocks in London rose 10,000 tons – please see below for month-long LME stockpile charts.

2009-03-20T10:12:00.000-07:00

Some weeks ago in a report we discussed Horsehead Holdings (NASDAQ:ZINC), a North American zinc producer from which primary zinc output is produced through EAF dust recycling. EAF dust recycling is has been in the metals news in recent days, as a number of dust recyclers have been scrambling to find new sources of EAF dust. With the extreme downturn in steel consumption, and therefore production, dust supply has been increasingly hard to come by for these producers, and plans to expand facilities and production have often been put on hold. A recent Platts article specifically mentioned Steel Dust Recycling (a relatively new private steel dust processor in the southern US), and its putting on hold plans to build a new Texas processing
facility.

EAF dust recyclers have cited their need to seek out steel producers still sending their dust to landfills instead of recyclers, and insist that the trend is still toward recycling. We are inclined to agree with that sentiment, if only because a profitable recycler like Horsehead has a reciprocal relationship with its suppliers; its raw material suppliers are also its finished product consumers. In this way the recycling business is very much self-sustaining, and totally independent of the pricing of the typical mined ore/processed metal that dominates
the global market.

2009-03-19T10:11:00.000-07:00

Today a couple of the Chinese provinces announced further reserves purchases of their own. Shaanxi Province is buying 77,000 tons of lead and zinc, and the Guangxi Province has announced its intention to buy 50,000 tons of aluminum, both to shore up the provinces’ smelters. The Chinese are taking very aggressive steps in the industrial space to shore up their domestic production of finished metal products, and the province purchases are just additional steps in the mold of the State Reserve Bureau purchases we have been seeing over the past few months. Particularly interesting, especially in the case of Guangxi purchases, is that the transactions will be funded with central Chinese government funds.

This is a directly coordinated event, and specifically designed to keep domestic Chinese producers functioning, even through periods of extensive losses. One further concern, however, is the rising prices of metals over the past week or so. If these increases continue, will the Chinese government continue to purchase reserves? Maybe not…

2009-03-18T10:10:00.000-07:00

There is an interesting story out today on stockpile registration in China, an issue that may keep cheaper metal, especially aluminum and copper from London, from getting to China. A law passed a couple of years ago requires foreign metal to be registered with Chinese authorities, and it may hinder getting the metal into Shanghai stockpiles in a timely fashion. More significant than just this instance, however, is the display of just how important imports of primary aluminum and copper are to Chinese industry. The stockpiles that the State Reserves Bureau has accrued over the past few months have put more emphasis on the importance of cheaper imports, as the purchases have moved to stabilize domestic pricing of primary metals.

2009-03-17T10:08:00.000-07:00

The big news yesterday in aluminum was that Alcoa (NYSE:AA) cut its dividend 83% with plans to reduce costs by more than $2.3 billion by 2010. The company will raise a further $1.1 billion in capital through the sale of common stock and bonds. The dividend cut from $0.17 to $0.03 comes in the face of the larger failure of the aluminum industry, where aluminum prices have dropped to trading around $0.60 a pound. These low prices are leaving most companies just barely treading water in production, and most producers are losing money trying to stay in business.

That Alcoa is taking such drastic steps to continue cutting costs (after production cutbacks and some worldwide shutdowns) does not bode well for the aluminum industry in the near future. Production is down, consumption (especially of flat-rolled products) is down and will continue to drop, and Alcoa expects aluminum and aluminum prices to see further declines (26% and 34% declines respectively).

2009-03-16T10:04:00.000-07:00

It seems that the rumor mill for Chinese State Reserve Bureau reserve-buying never stops churning. No sooner than the SRB finished buying its reported 300,000 tons of copper, it is now being reported by Macquarie that the SRB is considering purchasing a further 600,000-900,000 tons of copper reserves throughout 2009. Copper imports reached a record in February in China, and this further buying of reserves could possibly indicate that the Chinese believe that their own stimulus plan will push its economy through the global downturn.

2009-03-12T10:03:00.000-07:00

The metals rally driven by China over the last week or so has subsided, and stockpiles are starting to rise somewhat again as reports that we have not reached a bottom yet are growing louder. Out of China industrial output is down, retail sales were down more than expected and we are not seeing a quick response to the methods the Chinese government implemented with the State Reserve Bureau and through its energy and tariff policies toward its smelters.

2009-03-10T10:01:00.000-07:00

The precious metals are falling again as equities pick up, and gold has fallen below $900. This should not really change the fact that unless we see some real stability take hold, we are mostly seeing dips and bounces in gold prices mostly on their way up through the $850-$1050 trading range. Most analysts still seem to hold these positions regarding safe haven buying. But we are still seeing bearish and defensive signs from some of the larger gold companies, with the news today that Barrick Gold (NYSE:ABX) is cutting 200 jobs due to sustained high production costs in Tanzania.

2009-03-05T10:00:00.000-08:00

Base metals, aluminum aside, have been seeing some firm gains in the face of equity trouble. However yesterday the stock market was up sharply, and copper continued its ascent to a new three-month high and a fifth day of LME stockpile declines. Analysts are now suggesting that the worst could be over for base metals, especially if the stimulus packages work as they are technically supposed to. If that indeed turns out to be true, the Chinese have once again picked the bottom of the market very well. The State Reserve Bureau purchases were made at prices comparable to December lows, and very timely if we start to see demand pick up for copper and their other industrial base metals.

2009-03-04T09:59:00.000-08:00

Gold fell for the seventh straight session yesterday, and it finished at around $915. We still continue to see consolidation among junior mining companies involved with gold (see below for another gold joint venture), and mergers and acquisitions are a hot topic at the PDAC conference in Toronto. The high gold prices, even down at the $900 level, are still very enticing for any company with a site that can produce gold profitably, and most are anxious to get to production if they are not there yet. Given the time frame of the current rise in gold prices, it holds that most gold mines anywhere near production can ostensibly remain profitable at $700 or even $600 gold. If $900 remains a reality for an extended period of time, we will see new mining sites with higher costs of production popping up, but for now most sites near production should produce profitably and could be good values at current levels.

2009-03-03T09:58:00.000-08:00

To our eyes, the PDAC conference in Toronto is about 40% smaller than last year’s conference, a sign of the effect the recession is having on every sector, even gold (which again fell yesterday for the sixth straight day). However companies currently producing or are planning to produce in the next few months are showing signs of optimism. We are hearing that junior mining companies are stirring a lot of interest in M&A activity, often in order to secure the survival of promising exploration projects that mostly get swallowed up by majors during a downturn such as this.

2009-03-02T09:57:00.000-08:00

This week in Toronto is the PDAC mining conference, the largest conference for mining in the world. The snow in the northeast US is causing some problems for delegates and presenters this morning, but we should be able to give a detailed report of the conference in our weekly report due Friday. The mining world, especially the junior mining sector, is going through some serious changes during the global economic difficulties, and we expect to see more M&A activity throughout this year. Exploration companies will continue to be swallowed up by mid- to large-tier producers, and most of these quality exploration base, precious and minor metals companies will be up in Toronto this week.