Archive for the ‘PRICES’ Category

A commodities rebound is moving fast forward right on China’s doorstep

Sunday, August 21st, 2016

China may be slowing, but a commodities rebound is under way and the world’s biggest miner knows where the next growth story is building – emerging economies in South-east Asia.

Combined gross domestic product in the ASEAN-5 nations – Indonesia, Thailand, Malaysia, the Philippines and Vietnam – will rise about a third to $US3 trillion ($3.9 trillion) in the five years to 2020, fuelling commodities-intensive infrastructure projects. Momentum like this across Asia will help maintain and increase commodity demand, BHP Billiton’s chief executive Andrew Mackenzie said this week.

BHP’s staggering loss explained

Fairfax resources writer Peter Ker breaks down what’s behind BHP Billiton’s enormous $8.3 billion loss.

“People have been so used to believing that commodities was a China story, and that with China decelerating where’s the growth going to come from?” Nathan Lim, Sydney-based head of research for Morgan Stanley’s wealth management division, said by phone. “That incremental demand is coming from the emerging markets, and that’s the part people don’t have their head around.”

commodities -graph-2 image

Thailand is considering more than $US50 billion of infrastructure spending, while Vietnam has begun major projects including a $US10 billion rail modernisation, Indonesia is seeking to accelerate road to ports programs and Philippine President Rodrigo Duerte has promised new railroads and airport runways. These markets are “back on their growth path after a period of under-performance”, according to Lim.

Financial crisis

Commodities surged the most in the first half since the 2008 financial crisis as China’s economy stabilised and policy makers backed growth. The World Bank forecasts commodities will rebound next year after hitting the bottom of the cycle and Citigroup agrees, saying last month it’s bullish on raw materials for 2017.

A bellwether of commodities’ demand is steel. New demand across South-east Asia is seen increasing the market for China’s steel exports, which notched record volumes in the first seven months of 2016 and have supported rising iron ore imports.

China is already exporting about 12 per cent of its output and could raise sales overseas further, according to BHP’s Mackenzie. India will also import more iron ore, as will nations across Southe-ast Asia, he told analysts in a presentation Tuesday.

steel-worker-at-work image

Commodities surged the most in the first half since the 2008 financial crisis as China’s economy stabilised and policy makers backed growth. Photo: Jessica Shapiro

Steel proxy

“We look to use steel as a proxy, though you would naturally find the same dynamics for other commodities as well, whether it’s aluminium or copper or bauxite,” Morgan Stanley’s Lim said. Steel demand in the ASEAN-5 will grow at about 6 per cent this year and in 2017 on infrastructure building, according to the World Steel Association. Consumption of 74.6 million tons in 2017 will be more than in regions including Africa and the Middle East, and compares to forecast demand in China of 626.1 million tons, the association said in April.

Fortescue Metals Group, the No. 4 iron ore exporter, said in March it saw emerging sources of steel demand across Asia and in India. China is no longer the sole driver for the $US120 billion copper market, according to Andrew Cole, chief executive of OZ Minerals, a producer that’s also developing Australia’s biggest unmined deposit of the metal.

BHP's CEO Andrew Mackenzie image

Momentum across Asia will bolster commodity demand, BHP’s CEO Andrew Mackenzie said this week. Photo: Bloomberg

“Global demand for copper is becoming increasingly diversified, both geographically and by industry sector,” he said in an August 10 interview with Bloomberg Television. “We are seeing increasing diversification through other counties outside of China, which is an important factor that we need to remember.”

commodities-graph image

Still, global industrial production – output of mining, utilities and manufacturing – is well below historical levels and China “remains the only real growth story”, Macquarie Group said in an August 15 note.

The impact of action early this year to stimulate China’s economy is now fading, the bank said.

China accounts for about 65 per cent of iron ore imports, takes 21 per cent of seaborne metallurgical coal and consumes about half the world’s copper, according to a joint report this month by Westpac Banking Corp and Australia’s Department of Industry, Innovation, Science.

BHP, Whitehaven Coal, Alumina and Evolution Mining are among the companies that Morgan Stanley’s Lim sees benefiting from the emerging Asia growth story. BHP’s second-half underlying profits jumped 95 per cent, while coal producer Whitehaven reported Thursday it swung back to a net profit in fiscal 2016 from a loss the previous year.

“We are not saying that we have discovered a new China, or that India is going to become the new China,” Lim said. “The underlying message is that the reason we are seeing demand coming from ex-China, is that it’s the emerging markets where we see the next leg of growth.”



Henry Sapiecha


Poland may stop producing coal until at least the year 2018

Wednesday, November 11th, 2015

The Turów coal mine in Poland Kopalnia Węgla Brunatnego Turów S.A. or KWB Turów, is a large open pit mine image

Poland is considering to stop coal production at several of its mines until at least 2018 in an effort to help prices by reducing a global oversupply, while trying to keep state operations afloat and avoid job cuts.

The conservative Law and Justice party (PiS), which won parliamentary elections in October, would consider merging the country’s top power firms — PGE, Tauron, Enea and Energa.

“Personally I think Poland needs one big power company,” Grzegorz Tobiszowski, responsible for coal issues, told Reuters. He added the move would likely face scrutiny from the European Union over anti-monopoly regulations.

Poland’s troubled coal mining sector became a focal point ahead of the recent parliamentary election, as the outgoing government failed to rescue the troubled Kompania Weglowa (KW), the EU’s biggest coal miner.

About 90% of Poland’s energy is generated from coal, an industry with a strong local union, which can partly explain why Warsaw has long opposed the EU drive to curb carbon emissions.

About 90% of Poland’s energy is generated from coal, an industry with a strong local union, which can partly explain why Warsaw has long opposed the EU drive to curb carbon emissions.

According to Eurostat data, around 83% of energy consumed in Poland is produced from black and brown coal, while in the rest of the EU the average is 28%. With UN climate negotiations in Paris coming up in December and the EU committing to cut greenhouse gas emissions by 40% on 1990 levels by 2030, Warsaw has been under significant pressure to reduce that figure.

Currently, around 10% of the country’s energy needs are met by renewables (the average in the EU member countries is twice as high, at over 20%) and only 4% comes from natural gas and oil (while in the rest of the EU it is 25%), mostly imported from Russia.

Due to technological underdevelopment, the productivity of Polish mines is very low, with 648 tonnes of coal produced per worker per year while in the worst US mines it is more then 2,000 tonnes.

Despite that, Polish producers continue to invest billions in modernizing their coal-fired plants or in building new, more efficient ones. At least four new coal-fired power plants are expected to come on line by 2019, as the country faces a deficit of around 8 gigawatts of capacity starting in 2020, once the EU’s Industrial Emissions Directive kicks in.


Henry Sapiecha

HISTORICAL CHART – On the precipice: Will global markets follow commodities off the cliff?

Tuesday, August 25th, 2015

chart-market-to-follow-commodities image

From 1970 to 2004, commodities moved the opposite direction of assets like equities and bonds. For example, it was during times such as the 1990s that cheap inputs like oil and metals helped to fuel growth in industries across the globe.

When the oil price spiked, like in instances such as the Iranian Revolution and the subsequent Iran-Iraq War in 1980, the market reacted accordingly. In that particular case, inflation jumped to 11.3% in 1979 and 13.5% in 1980, a US recession was triggered, and many economic sectors were hit hard.

However, as we see in today’s chart, from 2001-2012 commodities (as measured by the Bloomberg Commodities Index) have more or less kept in line with the S&P 500. This is historically unusual and many analysts expected it would not last. In 2012, commodities diverged in a big way.

Gold and silver were the first to drop off. More recently, it was base metals and oil that fell off the cliff because of slowing growth in China and supply gluts. Today, the Bloomberg Commodity Index and the TSX Venture Composite Index are lower than they have ever been since their inception. The former is down -19.9% from the beginning of 2001. The Venture is down -40.1% since then.

Today may be the end of this trend of divergence. US equities are at a precipice: fueled by low rates and quantitative easing for years, they have finally started to tumble from record highs. Yesterday, the Dow had its largest one-day drop since April 2014 as it slid 350 points. Even tech darlings were down as $49 billion in market capitalization was wiped out, with Apple, Google, Netflix, Facebook, and Twitter all getting crushed in trading yesterday. Market sentiment is decidedly worse than it has ever been in recent years with the tailwinds of Greece, Puerto Rico, China, and other problems.

Making predictions are the dumbest possible idea, but they say that fortune favours the brave.

So here are some bold predictions:

Gold will at least hold its current value, if not see gains in the upcoming six month. US equities do not see sizable gains for awhile. The Fed does not hike rates in September (or if they do, it will be to a lack of fanfare from the markets). Industrial commodities like base metals will continue to drop off a little further as the overall market feels like it has lost momentum and supply gluts remain supreme.

What do you think will happen in the short and medium term?


Henry Sapiecha

CHART: Beijing has finally turned around rare earth prices

Friday, March 13th, 2015

CHART: Beijing has finally turned around rare earth prices

Beijing has a new strategy to tighten its grip on the rare earth supply chain. And it’s working.

Beijing has finally turned around rare earth pricesChina produces nearly 90% of the world’s rare earths and its downstream industry consumes 70% of the 17 elements used in a variety of hi-tech industries including renewable energy, medical devices and defence.

Customs data show export volumes grew 27.3% in 2014 to 28,000 tonnes but the average export price of REE products plummeted to only 83,000 yuan ($13,000) per tonne. That’s a decrease of 47.8% from the year before and the third year in a row of sharp declines.

Following a World Trade Organization ruling, China is abolishing its decade-old export quota system for rare earths and is due to lift export tariffs of 20%-plus in May.

This liberalization should translate into further price declines, but Beijing has found other ways to tighten its grip on the industry.

The price surge at the start of the decade resulted in widespread demand destruction and substitution causing long term damage to the industry

The country is consolidating the industry under six large organizations led by the newly-named China North Rare Earth Group. The Inner Mongolia-based company operates the Bayan Obo iron ore mine and before the 2010 price surge after Beijing reduced export quotes, produced half the world’s REEs as a by-product.

Apart from combining mine output China North Rare Earth and the five groups are being vertically integrated to help modernize the country’s mostly low-tech rare earth separation and refining businesses.

Long the scourge of the industry, China is also intensifying efforts to shut down small-scale illegal REE mining and is enforcing strict new environmental policies as part of its broader war on pollution.

Details are still sketchy, but the export quota system could be replaced by production control licences based on adherence to environmental standards (so-called “green permits”) while export tariffs could make way for a value added tax and export certificates.

China’s State Bureau of Material Reserve is also embarking on a new round of REE stockpiling, while the Baotou Rare Earth Products Exchange launched in March should encourage private sector stockpiling a la Fanya Metal Exchange.

These measures are pushing up the cost of production which is already being reflected in the price.

The Association of China Rare Earth Industry price index (a rolling 20-day average of REE prices across the industry) this week racked up gains of 13% since the end of last year.

Some light REEs including the work horses of the industry cerium and lanthumum continue to fall while terbium and dysprosium have soared recently so it’s not a broad-based rally just yet.

Neither is it a return to he crazy days of 2010 – 2011 by any stretch, nor the mid-2013 rally (which turned out to be a dead cat bounce). But a turnaround nonetheless.

The price surge at the start of the decade resulted in widespread demand destruction and substitution causing long term damage to everyone from rare earth explorers to magnet manufacturers.

A steady – if unspectacular – build-up in price may be just what the industry needs.


Henry Sapiecha

US Dollar destruction of commodity prices is almost at an end

Friday, November 28th, 2014


The gold price drifted lower on Thursday falling below $1,200 and down nearly $10 overnight, hurt by a 6% slide in the price of oil.

The two commodities often move in tandem because cheaper crude leads to lower inflation, tarnishing gold attractiveness as a hedge against faster rates of price growth.

The fall in the price oil has given another boost to the US dollar. Commodities priced in US dollar usually have an inverse relationship to the world’s reserve currency.

The greenback’s rise to near five-year highs against a basket of currencies has pressurized not on the price of gold, but everything from copper and cotton to milk and molybdenum.

InvesTRAC passed on this price graph to indicating that the US dollar’s stunning run since May may be close to correcting.

The technical research and investment blog notes the advance from the May low has “unfolded in five waves which ought to be followed by a three wave correction”:

The top of wave 5 seems to be tracing out a head and shoulders top and a dip through 87.50 would open the way to violate the uptrend and teat the bottom of wave 4 at 84.50. The technical picture shows InvesTRAC’s short term direction indicator has turned down from an overbought situation with the forecaster showing weakness could be expected until the last week of December. So the stage is set for declining dollar and rising to soon get underway.

investrac-dollar-index image

InvesTRAC believes the dollar chart confirms movements in the CRB Commodities index and that the decline in the broader commodities index from its June high was probably terminating after a 15.5% decline.

The InvesTRAC short term model shows that the OB/OS indicator has just begun to rise with the forecaster showing a rising ternd into early February. The daily chart below shows a 15 percent rise form the January lows which has more than been taken back by the second half slump…the index has ticked up slightly and is encountering the downtrend with a massive divergence on its RSI. My conclusion is that the worst is over and that we should now (or very soon) see the hard hit commodity prices lifting off their lows.

investrac-commodity-index image

Henry Sapiecha


Saturday, September 13th, 2014












But China’s seemingly endless appetite for iron ore has been finally been shown to have limits, and the iron ore price has been driven lower by the ever-increasing volumes of iron ore leaving Australia and Brazil.

Only now, as the price for Australia’s top export commodity slumps at a five-year low, does there appear to be a consensus that iron ore, and mining generally, was helping to prop up government revenues and sections of the economy far away from the rocky gorges of the Pilbara.

The recent corporate reporting season was littered with companies that named weakness in the mining sector as a factor in their own underperformance.

The trend went far beyond the traditional mining services crowd and was seen in airlines, media publishers and even clothing manufacturers who have noticed demand for their workwear products to be lower than in the past.

No longer a debating point, the lived experience in Australia suggests life is harder beyond the peak of the iron ore boom.

Not even the boldest iron ore bull would deny the recent slump in the iron ore price slump is serious.

In a consistent slide since December 4, 2013, the benchmark iron ore price has fallen 41 per cent to reach the point where several of Australia’s junior exporters are barely break-even propositions.

Two microcaps trying to export from the gulf region of the Northern Territory, an off-broadway location in the world of iron ore, have already gone bust, while others like Gindalbie appear to be approaching something like a death spiral.

A huge increase in iron ore supply from the major exporters – Rio Tinto, BHP Billiton, Brazil’s Vale and Fortescue Metals Group – has correctly been named as a major factor driving prices lower, but ANZ commodity analyst Mark Pervan said weakness in the Chinese real estate and steel sectors had also conspired to create a “perfect storm” of factors in 2014.

At this week’s prices below $US83 per tonne, Mr Pervan said iron ore had now fallen too far.

“Markets never get it right straight away, they always overshoot on the up side and the down side, and I think we are seeing a classic example here of overshooting on the down side,” he told a Bloomberg event in Melbourne this week.

Citi’s China-based commodities analyst Ivan Szpakowski said the forces behind the price falls in autumn were different to the forces pushing down the price in recent weeks.

“[The second quarter] was very much supply-driven, but this is not,” he said, noting that iron ore deliveries to China have been lower in the past two months than they were in the June quarter.

“What you saw instead was very weak end-use demand and that came both from the fundamental weakness in Chinese real estate and also from seasonal weakness because August tends to be one of the weakest times of the year for steel demand.”

Mr Szpakowski said steel mills had been running down their stockpiles rather than purchasing iron ore, and with the price sliding by the day, he said mills and traders knew they could wait and buy later at cheaper prices.

“You had a few of these factors within China really driving the move I think,” he said.

From an Australian point of view, one of the starkest aspects of this year’s price slide has been the pressure put on companies that export lower grades of iron ore.

The sudden appreciation in value for lower grade iron ores, dismissed as worthless for decades, was one of the defining features of the early years of the mining boom.

Entrepreneurs like Fortescue’s Andrew Forrest and Atlas Iron’s David Flanagan were quick to seize on the emerging trend, and they created fortunes by snapping up territory that had largely been ignored by BHP and Rio because it was not considered to be good enough for the traditional export business.

While Rio and BHP continued shipping ores with 62 per cent and even 64 per cent iron, the new entrants made billions shipping ores with iron grades closer to 57 per cent.

But this year, with huge amounts of the top quality stuff coming into the market (and China making more of an effort to clean up the efficiency of its steel industry), the walls started to close in on those selling lower grade ores.

The discounts of about 7 per cent that they had always accepted for their product began to widen to as much as 20 per cent, sending profits lower and forcing those companies to focus on finding better quality product to export.

The dynamic has reportedly eased in recent months, but none the less, China’s waning appetite for our lower quality iron ore is a significant moment in the fading of the iron ore boom.

In March, UBS published its own estimates of break-even points for iron ore miners, suggesting that while BHP Billiton and Rio Tinto had substantial buffers – still breaking even with the iron ore price at $US45 and $US43 a tonne respectively – Fortescue’s break-even point was at US$72 a tonne and Atlas Iron’s at $US82.

The pain of the low price environment has naturally been reflected in the profits and share prices of the iron ore companies, but its true impact goes much deeper.

Iron ore ranks as Australia’s most lucrative export commodity and an important part of state and federal government budgets.

Leading economists estimate the iron ore price declines seen this year have robbed the federal government of between $US10 billion and $US15 billion in revenue, forcing it to chase new sources of revenue in unpopular places.

“With an iron ore price like this, it is going to lower nominal growth,” said former treasurer Wayne Swan, whose time in charge of the national purse was also bedevilled by iron ore price volatility.

“You’d have to say [the Abbott Government] would be starting to think that they’ve got a bigger challenge on their hands than they would have thought at budget time,” said Mr Swan.

The situation is far more problematic in the iron ore industry’s home state of Western Australia, where less than seven years ago, revenue from all types of mining royalties represented barely 5 per cent of state government revenue.

Having risen every year since, iron ore alone will deliver 19 per cent of government revenue in the current financial year, rounding out at about $5.59 billion.

With iron ore revenues predicted to rise in every year of the four-year forward estimates period, Western Australia’s financial position could be sound.

But despite raking in billions of dollars from iron ore every year, WA mistakenly expected to be showered with even higher amounts of royalty revenues, and started spending before the proverbial chickens had hatched.

The WA government had expected iron ore prices to average $US122.70 this financial year, and will lose $49 million for every $US1 decrease in the average price below that target.

The state is now using debt to fund its high public-sector wages, its new football stadium and its riverfront redevelopment, and despite being at the epicentre of the decade-long commodities supercycle, no longer has a Triple A credit rating.

Campbell Jaski, a corporate restructuring expert at PPB Advisory, said a weaker Western Australian economy would unavoidably affect other state governments around Australia through the system of sharing GST revenues.

“The flow-on effect will hit all the other states, because as WA’s royalty rates reduce, their share of the GST which they currently give up to the other states will start to pull back,” he said.

“So all of a sudden Victoria, New South Wales, Tassie, Northern Territory, South Australia and Queensland will have to start paying back more GST revenue to WA as a result of the royalties falling in iron ore.”

Former federal resources minister Martin Ferguson said a diverse range of businesses would also be feeling the impact from lower iron ore prices.

“It also flows through to business in the loss of jobs and the loss of purchasing power,” he said.

“Declines in mining do have an Australia-wide impact. Think of the legal firms, the banks, environmental scientists, the airlines and the caterers, there is a huge multiplying effect.”

The existence of such links between the mining industry and the rest of the Australian economy has been hotly debated at times over the past decade, but the recent corporate profit season revealed no shortage of companies willing to bemoan the fading of the boom.

Airlines, from the fly-in, fly-out or FIFO-focused Alliance Aviation to the more mainstream Qantas, named weaker demand in the mining sector as a factor in their deteriorating profit position.

Fresh from building a large accommodation facility for iron ore workers near Port Hedland, accommodation provider Fleetwood reported that the WA market had become “subdued” in terms of winning new work.

The workwear clothing division that Pacific Brands recently sold to Wesfarmers had been affected for some time by softer than expected demand in the resources sector, while even Fairfax Media, the owner of this publication, blamed weak conditions in the mining sector for the lower revenues seen in its rural newspapers over the past year.

While some high-profile bears like former BHP executive Alberto Calderon expect the iron ore price to continue falling below $US80 per tonne, most investment banks expect it to be higher by Christmas.

Morgan Stanley expects the price to average between $US85 per tonne and $US95 per tonne in the 2015 calendar year, while Citi expects it to average $US90 per tonne in 2015 before slipping to average $US80 per tonne in 2016.

China’s demand for steel, and therefore iron ore, is expected to continue growing until 2025 or 2030, but beyond that time demand will need to come from somewhere else.

Rio Tinto has optimistically suggested that iron ore demand in India and South-East Asian nations like Indonesia and Vietnam will start to rise after 2020, but there’s little certainty around the predictions.

By then, Mr Calderon argues Australia must have moved on from its reliance on iron ore to be supplying China with “middle income commodities” like meat, grains, energy and copper.

But he warns that serious reform and investment in infrastructure will be needed to make that happen.

But amid the gloom, (and there has been plenty of it on offer this week), it’s worth considering the lot of the workers at Port Hedland, where the vast majority of Australia’s iron ore sets sail for Asia.

While the peak of iron ore prices and stock values was undoubtedly reached in early 2011, the sleep-deprived workers at Port Hedland know all too well that the peak for iron ore exports through the port is yet to come.

Australian exporters will continue to grow the volume of exports each year until the end of the decade at least, and according to some estimates the increased export volumes should be enough to offset the falls in the commodity price, ensuring consistently higher export values.

Despite the severe price falls that have already been witnessed in the early months of the 2015 financial year, the federal government’s top commodities forecaster, the Bureau of Resources and Energy Economics (BREE), predicts the value of Australia’s iron ore exports will be about 3 per cent higher this year than last at just under $80 billion.

Export values were tipped by BREE earlier this year to continue rising on the back of higher export volumes at a compound annual growth rate of 7.4 per cent to reach $87.7 billion by the 2019 financial year, but those numbers could yet be revised down when the bureau updates its forecasts later this month.

Cleveland Mining boss David Mendelawitz was involved in the early Fortescue days when iron prices were closer to $US30 per tonne.

He reckons the strength of the sector depends on your perspective.

“Prices are not low, the issue is that costs are high. Not so long ago people would have wet their pants in excitement at the prospect of $US80 per tonne iron ore prices.”

Henry Sapiecha


Friday, July 4th, 2014


Shares in producers dumped after as China’s crackdown on shadow banking system snares metal-backed trade loans

Benchmark iron ore fell more than 2% on Thursday to fresh lows last seen September 7, 2012.


According to data from the The Steel Index, the import price of 62% iron ore fines at China’s Tianjin port was pegged at $91.50 per tonne, down $2 on the day.

China is responsible for two-thirds of the 1.2 billion tonne seaborne trade and the fresh declines in the price of the steelmaking raw material has been blamed on data out on Thursday showing credit growth in in the world’s second largest economy slowing.

While official bank lending increased, the flushing out of riskier debt in the economy led to an overall decline.

Beijing is clamping down on unofficial financing activities happening outside state-owned banks, the so-called shadow banking system. The use of commodities – particularly copper and iron – as collateral in trade financing agreements makes up a large portion of the unofficial banking sector.

Estimates vary wildly but the portion of iron ore and copper stockpiles at the country’s ports tied up in these deals could be as high as 60%.

Last week’s revelation that authorities are probing whether traders at the port of Qingdao pledged the same copper, iron ore and aluminum inventories as collateral for loans multiple times to different banks could mean and end to practice alltogether.

After a strong first quarter iron ore imports fell back to 77.4 million tonnes in May, down 7.2% from April; a sign that these deals may be unwinding at a more rapid rate than previously thought.

With soft underlying demand, record high stockpiles of more than 100 million tonnes and ample supply of seaborne ore already hurting prices, the dumping of finance-related inventories onto the market is destined to bring further weakness.

The dumping of finance-related inventories onto the market is destined to bring further weakness

Morgan Stanley on Thursday cuts its iron ore price estimate for this year and the investment bank foresees a further drop in 2015. Morgan Stanley forecasts iron ore to average $105 tonne for the whole of 2014 versus a year to date average of $113 a tonne. Back in May, the bank still pegged $118 for this year.

For 2015, when an increase in seaborne supply will more than make up for domestic Chinese production cuts the bank sees iron ore averaging $90 a tonne, a more than one-fifth cut to earlier estimates.

Iron ore is down more than 30% year to date and first declined to double digits mid-May. Attempts at a comeback since then have fallen short.

Apart from that quick gap down in 2012 when the steelmaking raw material spent two weeks below $100 a tonne ore hasn’t traded in double digits at all since 2009 during the financial crisis.

Share prices for the Big 3 – number one producer Brazil’s Vale (NYSE:VALE) and Australian giants Rio Tinto (LON:RIO), BHP Billiton (LON:BHP) – all declined sharply on Thursday, taking huge chunks out of their combined market value of close to $300 billion.

ADRs of Vale lost 3.8% in New York and the Rio de Janeiro-based company is now down 19% in 2014 despite a huge boost from its nickel operations – it’s the world’s number two producer – thanks to a soaring price for the metal used in steel alloys.

Number two Rio Tinto, which thanks to aggressive expansion in its home base of the Pilbara in Northwest Australia have been rapidly closing the output gap with Vale, dropped 3.2% in New York bringing its losses year to date to 9%. Among the diversified giants, Rio is most exposed to iron ore which last year accounted for nearly all its profits.

The world’s number one miner with a market value of $170 billion BHP, which has also been adding to its iron ore business this year even as it sell off assets in other divisions, gave up 1.2% in New York.

In a recent earnings announcement BHP said every $1 decline in the price of iron ore translates into a $120 million hit to the bottom line and the Melbourne-based firm portfolio of assets are not that heavily skewed to iron ore as its peers.

It was another bad day for North American operator Cliffs Natural Resources

Number four producer behind BHP, Sydney-listed Fortescue Metals Group (ASX:FMG), fell 4.6% in Sydney, but is down 27% this year given that all its ore is shipped to China. From zero production seven years ago is targeting output of annualized 155 million tonnes in 2014.

It was another bad day for North American operator Cliffs Natural Resources (NYSE:CLF) which brought the counter’s losses for the past month to 21%. The Cleveland based firm is idling mines and cutting expenditures amid an ugly boardroom battle.

Anglo American’s ADRs (OTCMKTS:AAUKY) trading in New York declined 3.2%. Apart from a hit from iron ore and copper, shares in the London-based company fell after an end to the strike in South Africa saw platinum group metal prices tank.

Henry Sapiecha


Friday, July 4th, 2014


This image was taken by the Advanced Spaceborne Thermal Emission and Reflection Radiometer (ASTER) on board the NASA research satellite Terra. The image covers an area of 15 × 19 km.

Bayan Obo mine Inner Mongolia China | Source: NASA

Participants in the rare earth industry have been through the grinder over the past decade.

Amid stiff competition for title of commodity with biggest booms and biggest busts (nickel anyone?), rare earths take top honours.

Here’s a quick recap of what brought us here:

    • 80 years ago placer deposits in India and Brazil, and later monazite ore from South Africa meet the world’s REE demand, such as there was.
    • The US steps in but after five decades as the world’s top source Molycorp mothballs Mountain Pass in 2002.
    • China quickly establishes a monopoly on global production and then panics markets by introducing export quotas in 2005.
    • REE prices goes into the stratosphere (for example, dysprosium prices do a bitcoin, rocketing from $118/kg to $2,262/kg between 2008 and 2011).
    • Scores of explorers jump into the space with Canadians and Australians finding deposits all over the world from Manitoba to Malawi.
    • Old mine plans are dusted off and punters pour billions into the sector.
    • Trade spats ensue, lobby groups spring up and politicians even find ways to bash Barack Obama over rare earths.
      • Rare earths become the basis for a bestselling video game and Hollywood comes to the party, albeit late, using samarium as a plot device and confusing entertainment writers everywhere.
      • REE prices begin to tank even before production outside China ramps up and stock in bellwethers Molycorp and Australia’s Lynas dive.
      • The WTO finally rules on the legality of China’s export restrictions – years after the quotas became irrelevant.
      • When Kim Jong-Un gets in on it, it’s a sign the industry has hit rock bottom.

      Now it seems a turnaround may be in the offing.

      And again you have China to thank.

      Faced with growing discontent at home, China’s new leadership in March declared a war on pollution.

      And its low-tech and dirty REE industry is firmly in the crosshairs.

  • rare earth dmans graph roskill-supply-ree-2014 chart image
    • Another reason why there is room for new producers is the increasing prevalence of captive supply
      Some estimates put exports from illegal mining through networks in Vietnam and Hong Kong as highs as 40,000 tonnes, matching China’s annual quotas, further depressing prices.Beijing is poised to impose a bunch of new environmental regulations including green export certificates and new taxes that are based on the value of the minerals, rather than on volume as is the case at present.

      Rare earth production taxes are pegged at RMB60 ($9.14) per tonne mined for light rare earth operations and RMB30 for medium and heavy rare earth operations.

      Any increase will mean higher prices at the producer level, particularly for rare earths with greater value such as europium, terbium and neodymium, and a reduction in stockpiles. At least that’s the intention.

      Official English outlet China Daily reports the move aims to reflect the scarcity of the minerals (China maintains it only has 23% of the world’s REE reserves even though it still produces more than 80% of the global total) and the impact of extraction.

    • rare-earth-fob-china-domestic-apr-14 chart image
    • Businessweek quotes Chen Huan, a rare earth analyst with Beijing Antaike Information Development, a research unit of the state-backed China Nonferrous Metals Industry Association, as saying the new rules could see prices rise more than 20% from current levels.Higher prices are not just useful for Beijing in terms of better environmental regulation, but as most of the larger miners and processors are state-owned, higher prices affect the bottom line directly

      It’s an outlier, but praseodymium prices are already up 60% from a year ago

      While prices rose and fell more or less in unison, predictions are that prices of the 17 elements may begin diverging more – particularly between lights and heavies. It’s an outlier, but praseodymium prices are already up 60% from a year ago and at times trade for as much as $140 per kilogram oxide.

      While not quite as sanguine as other market observers, research house and rare earth authority Metal-Pages also sees signs of a turnaround in REE prices which could occur “across the board in 2015” as supply and demand factors become more balanced.

    • The London and Beijing-based data provider in its latest outlook cites a number of factors for optimism about prices and the viability of new mining projects outside China:
      • Smuggling has subsided slightly, due to low prices and China’s ongoing crackdown
      • Prices have become uneconomic for many producers
      • Recycling of REEs remain difficult and expensive and the impact on supply and therefore prices could be a decade away
      • Demand for high-powered magnets could grow 5%–8% over the next decade
      • Forced consolidation and vertical integration of Chinese industry should reduce competition and make output control easier
      • Chinese domestic consumption already at 70% of global total, is expected to rise sharply as it ramps up domestic clean energy and moves into more high-tech sectors
      • After WTO ruling against it Beijing’s strategy is shifting from export to production control
      • The Baotou Rare Earth Products Exchange launched in March should encourage private sector stockpiling a la Fanya Metal Exchange
      • rare earth roskill-demand-pie graph image

      The lifting of export quotas as mandated by the WTO (China is appealing the ruling, but doesn’t really have a better chance to make its case stick a second time around) is not expected to have an influence on prices.

      Exports since 2005 has not even come close to the export ceiling and over the past three years, quotas were more than 20,000 tonnes above actual exports.

      What could have an impact is the removal of export taxes on rare earths products which have been raised and widened on several occasions and are now levied at 15% – 20% by the country’s General Administration of Customs.

    • Roskill Information Services says in a new report scrapping these taxes could affect non-Chinese producers by potentially reducing FOB rare earth prices, and bring it in line with domestic Chinese prices.The impact, at least in the short term, could be significant as domestic prices were on average 36% below reported FOB prices in April this year according to David Merriman, senior analyst at the London-based metals and minerals consultancy.

      However, says Merriman, both FOB and Chinese domestic prices are expected to increase based on new tighter control of production and increasing costs.

    • Another reason why there is room for new producers is the increasing prevalence of captive supply.Purchasers of raw material that produce downstream rare earths products like powders and magnetic alloys are eligible for a 16% VAT rebate.

      That’s one of the reasons Chinese producers like Inner Mongolia Baotou Steel Rare Earth Group and Chinalco have invested heavily in downstream facilities (thanks to its three Chinese plants, Molycorp also happens to be one of the companies benefiting from the rebate).

      “Increased captive supply since 2012 has resulted in a greater portion of rare earth raw materials and intermediate products not being made available even to the Chinese domestic market and thus reducing supply for other consumers,” says Merriman.

      The biggest longer term threat to the industry is substitution.

      Rocketing prices in 2010–2011 sent consumers scurrying to find alternatives and ways to use less with tolerable results.

    • The Baotou exchange launched in March should encourage private sector stockpilingIt’s an outlier, but praseodymium prices are already up 60% from a year ago

      Roskill Information Services says in a new report scrapping these taxes could affect non-Chinese producers by potentially reducing FOB rare earth prices, and bring it in line with domestic Chinese prices.

      The impact, at least in the short term, could be significant as domestic prices were on average 36% below reported FOB prices in April this year according to David Merriman, senior analyst at the London-based metals and minerals consultancy.

      However, says Merriman, both FOB and Chinese domestic prices are expected to increase based

  • Metal-Pages says depending on the industry and companies involved consumption fell between 25% – 75%: “One of the most dramatic cases is the reduction in the use of dysprosium in high performance NdFeB magnets. Magnet makers have successfully reduced use by 50-75% and for some magnets or eliminated it all together.”While much higher prices would be a more than welcome development for the dozens of rare earth explorers and developers that are still out there, another panic in the West on pricing would only lead to long-term demand destruction.

    The giant mine in Bayan Obo, Inner Mongolia near Baotou City, produces almost a third of the world’s rare earths and does so as a byproduct of iron ore mining.

    Henry Sapiecha

Weak ore prices, high costs cause Labrador Iron Mines to cease operations

Friday, July 4th, 2014

labrador-iron-mines-halts-operations-on-weak-ore-prices-high-costs image

Falling global iron ore prices and the need to cut costs have forced Labrador Iron Mines Holdings Ltd. (TSX:LIM) to halt operations at its mines for the year.

Reporting its results for the fiscal year ended March 31, the company said 2014 will have to be a “development year,” with major efforts focus on its flagship Houston Mine, located near Schefferville in the western central part of the iron-rich Labrador Trough, one of the most prolific iron ore producing regions in the world.

The project, expected to start production in April 2015, is still subject to completion of financing and the negotiation of major contracts.

Desjardins Securities analyst Jackie Przybylowski said in a research note that the firm could start work on the Houston Mine this summer but it would have to raise $20-million to do so.

“We see a low probability that the company will raise the required funds in the next few years,” Przybylowski wrote.

houston-mine-location map image

Labrador Iron said it is also looking to lower costs by renegotiating with major contractors and suppliers, and has already put in place savings initiatives in various areas including mining equipment rates, rail car leasing rates and corporate and administration costs.

Savings initiatives have already been put in place in several areas, including mining equipment rates, fuel procurement, aviation services, hydroelectric power, rail car leasing rates and corporate and administrative costs.

Even directors’ fees have been waived.

Hard sell

Iron ore mining in the Labrador Trough region of Canada has been a hard sell recently, but the Quebec government’s commitment of up to $19.2 million ($Cdn 20 million) for a feasibility study on a new rail link that would connect mines in the area to ports, may be about to change that.

While the 1000-kilometre-long area —home to one of the world’s largest high-quality iron-ore deposits— seems attractive to miners, investors are understandably wary of the region right now.

While the 1000-kilometre-long area —home to one of the world’s largest high-quality iron-ore deposits— seems attractive to miners, investors are understandably wary of the region right now.

There still are uncertainties in the market, such as current prices sinking close to two-year lows and the fact some miners have been either shelving projects in the region or having difficulties selling them.

Cliffs Natural Resources (NYSE:CLF) said mid-February that it was postponing an expansion of its Bloom Lake mine in the region, while Rio Tinto (LON:RIO) failed to find a buyer for its 59% stake in Iron Ore Company of Canada, or IOC.

Shares in Labrador Iron Mines were down almost 10% to 0.0950 at 12:05 pm ET.

Henry Sapiecha


Saturday, May 24th, 2014


auto-catalyst-platinum-photo image www.www-globalcommodities.comARROW CHART UP TP RIGHT BLUE IMAGE

South Africa and Russia combined account for close to 80% of global supply of palladium which is mainly used to clean emissions in automobiles.

More than 70,000 workers at the world’s three largest platinum and palladium producers, Anglo American Platinum (LON:AAL), Impala Platinumm (OTCMKTS:IMPUY) and Lonmin (LON:LMI), went on strike January 23.

In South Africa a judge of the country’s labour court ordered mine management and the militant Amcu labour union into three days of mediated talks on Thursday, seen as the best chance to end the bitter dispute.

According to a website set up by producers the companies’ have lost combined revenue of R18.8 billion (some $1.7 billion) while striking workers have lost more than $800 million in forfeited wages.

Roughly 10,000 ounces of platinum production and 5,000 ounces of palladium are lost each day the strike drags on. Even when strikers do return to work it would take up to three months to restart production.

At the same time Russia ordered its troops amassed on the border with Ukraine to withdraw to “create favourable conditions for Ukraine’s presidential vote and end speculations,” according to President Putin.

Near perfectly timed launch of South African palladium ETFs has boosted total holdings by 30% since April


A huge factor boosting the the palladium price has been the launch of two new physical palladium-backed exchange traded funds in Johannesburg in late March.

Ole Hansen, head of commodity strategy at Saxo Bank said in a squawk on Thursday the “near perfectly timed launch” of the ETFs by South African banks Absa and Standard has boosted total holdings by 30% since April to close to 85 tonnes or 3 million ounces.

Holdings in a platinum ETF listed a year ago on the Johannesburg Securities Exchange are also at record levels.

July platinum also strengthened on Thursday to $1,475 an ounce, up 7% in 2014.

Platinum production is nearly as concentrated as the of palladium with Russia and South Africa controlling more than 70% of global output, with North American producers a distant third.

Industry consultants Johnson Matthey Plc said yesterday platinum consumption will beat supply by 1.22 million ounces while the palladium shortfall will widen to 1.61 million ounces, from 371,000 ounces last year and the eighth year in a row of deficits.

Bloomberg reports that would constitute the largest market deficits ever, based on Johnson Matthey data going back to 1975 for platinum and 1980 for palladium:

“Supply-side issues are common to both platinum and palladium,” Peter Duncan, general manager, market research at Johnson Matthey, said yesterday. “We do expect auto demand to keep rising. In the medium term, this is mainly to do with emissions legislation in the case of platinum, and mainly growth in vehicle production in the case of palladium.”

A 17-week strike at South Africa’s PGM mines and a stand-off between the West and Russia have pushed the palladium price up nearly 16% this year.

The price of palladium hit fresh three-year highs on Wednesday, despite encouraging signs that labour action in South Africa may be nearing a conclusion and news that tensions on Ukraine’s border may be easing.

June palladium futures jumped 1% to $834.45 an ounce in New York, the highest level since March 2011, before easing slightly to $830.60 an ounce in afternoon trade. Palladium hit a record high of $865 in February 2011.

Henry Sapiecha