Steel
Macquarie’s survey on China’s steel industry reveals softer sentiment as order growth has slowed. Capacity utilisation has slipped slightly, although the broker notes this is comparatively elevated in spite of narrower margins.
Inventory of coke/coking coal and iron ore have risen although most participants in the survey reported there has been a decline in buying interest for the near term. Steel stocks in terms of days of sales slightly increased for both traders and mills, which Macquarie notes is consistent with indications of a slower decline in production compared with demand. Export demand is also softening.
Demand for long and flat steel products slowed in June with the latter showing the most weakness. While the deterioration in order growth from the machinery sector was the greatest it still remains positive. Automotive and white goods segments reported a small decline. The infrastructure and property segments appear more stable.
ANZ Bank researchers suggest healthy margins for steel mills have encouraged production growth in China but this could be under threat as provided profitability falls. Margins have collapsed more than -20% since May and are now in negative territory for rebar. The analysts researchers suspect this could take the heat out of the iron ore market.
Russia’s Base Metals
Russia has proposed introduction of a 15% export tax on aluminium, copper, nickel and steel to combat price inflation and boost tax revenue. Russia’s exports of base metals account for 3-6% of metal demand outside of Russia.
Assuming the taxes are imposed only on primary metal, Morgan Stanley expects this will create a push to exports of downstream fabricated products where possible, particularly in the case of copper and aluminium.
Markets also may tighten if producers are incentivised to carry out maintenance and trim production, or build domestic inventory and withhold supply from global markets. A tightening of markets dependent on imports from Russia could feed into modest support for commodity prices in the second half of 2021.
Oil & OPEC
OPEC (Organisation of Petroleum Exporting Countries) members have some pressing issues, ANZ Bank researchers suggest. Stronger economic growth is likely to mean a recovery in demand accelerates and tightens the oil market further.
Still, this is complicated by the prospect of rising supply from a variety of sources as well as sudden outbreaks of coronavirus. Demand for transport fuel is surging as vaccinations allow travel restrictions to be eased. The market is also heading into the peak northern summer demand period.
Still, a full recovery is some time away as international borders are largely closed which caps a recovery in jet fuel. Overall crude demand is still well below pre-pandemic levels.
The researchers expect OPEC will try to balance the market and expect a small production quota increase of around 500,000b/d in August that could support higher prices. If OPEC holds off on further increases to supply the risk of a price rise beyond a short-term target of US$80/bbl increases substantially.
The prospect of Iranian oil hitting the market in the short term has meant OPEC is cautious about increasing supply. If US sanctions are lifted against Iran, the researchers envisage a rise of over 1mb/d to 3.4mb/d within six months.
World consumption was around 96.2mb/d in May, -8% below the levels of 2019. This may not improve if the new delta variant of the coronavirus takes hold in major consumer regions.
Yet, the US is the main driver of growth in oil demand and its GDP growth forecast for 2021 is 6.5%, a rate the researchers assess has not been achieved since the early 1980s.
Longview Economics considers upside to the oil price is limited for both technical and fundamental reasons and there is a growing risk of a pullback in coming weeks, or at the very least a consolidation phase.
The oil price is now at or above the fiscal breakeven for most OPEC members so the pressure to bring back spare capacity is starting to build up. Technically, net speculative long positions are the most crowded since 2018 and a number of the analysts indicators are now on Sell.
Fundamentally, there is also a case for a lower oil price as various factors point to a shrinking of supply deficits over 2021 and 2022. Longview Economics agrees the balance of power in the oil market remains with OPEC et al.
The cartel is increasingly incentivised to increase supply to regain market share, limit price strength and discourage additional supply from high-cost producers. Also, potentially, to limit the speed at which the world transitions to green energy.
Moreover, US shale supply will begin accelerating and Longview Economics suspects OPEC is underestimating its strength. The analysts also flag the possibility of a large increase in Iranian production.
The global oil market is expected to be broadly balanced for the remainder of 2021 and 2022. Also, with the global oil market no longer in a tightening phase the slump in global inventory should ease up. Hence, at the margin, the main driver of the oil price uptrend should weaken.
Green Aluminium
Goldman Sachs has upgraded aluminium price forecasts, expecting material cost inflation, driven by a policy that creates a “green margin”, and a sharp deceleration in primary metal production.
The broker’s outlook indicates the slowest supply growth in aluminium in almost 40 years. A deficit of -3mt by the end of 2023 and even as high as -9mt by mid decade. Goldman Sachs expects the aluminium price to average US$2450/t in 2021, US$2900/t in 2022 and US$3250/t in 2023.
The industry emits around 1.1gt of carbon dioxide per annum, equating to 3% of global emissions. Global aluminium producers are very aware of the decarbonisation challenge and the race is on to cut emissions and produce greener aluminium.
Several companies such as Rio Tinto ((RIO)), Alcoa, Norsk and Rusal are already receiving a small premium for green aluminium. Goldman Sachs expects premiums will emerge for those that can produce “greenish” aluminium, mostly by incorporating hydro power.
Rio Tinto and Alcoa aim to commercialise the ELYSIS inert anode technology in Canada by 2024. The benefits include reducing aluminium emissions by 1.8t of carbon dioxide per tonne of aluminium, a -15% reduction in operating costs and a 15% increase in aluminium production
Goldman Sachs calculates the technology could be economical at a zero carbon price if it can be installed for less than US$1000/t. With a positive view on aluminium prices Goldman Sachs retains Buy ratings on most aluminium companies.
