Commodity Review 20190301 by Andrew Pedler – Now Available

Commodity Review 20190301 by Andrew Pedler – Now Available

World Steel,  USA

Comments of particular interest are noted with ‘*’.

Matau’s Comments:

Geopolitical factors continue to drive uncertainty in global investment and industrial markets.  However there are signs that some of the key factors:  Trade / tariff wars, and some sanctions may abate in the near term (USA-China, USA North Korea, USA sanctions on Rusal).  Others remain:  (Venezuela, Brexit).

CRU’s analysis of the iron ore  / steel industry highlights China’s structural reform of its steel industry, reducing capacity from 1,250 Mtpa to 1,000 Mtpa but becoming profitable.  According to CRU, shifts in demand for steel raw materials will also be driven by forecast increased scrap steel usage in China, offset somewhat by demand growth from SE Asia-Five. 

World steel production clearly shows that virtually all the growth in production has been from Asia, rather than the developed world.  That is not forecast to change.  

Base metals’ fundamentals are tight, and getting tighter, and sentiment appears to be starting to refocus, (or is it just a glance), on the state of supply / demand. 

Matau’s expectations are for a broadly sluggish 2019, by weak growth from advanced economies, offsetting growth from emerging economies, with stronger pickup in fundamentals broadly occurring in 2020 (as outlined by OECD CLI).  We believe this is influenced also by the fact that most global news systems are from advanced economies, whose own lethargic performances may be ‘news’ ahead of more distant ‘emerging’ economies where the real growth is from.  We need to be watching the news from emerging economies:  economics, elections, major holidays, political policies and shifts in direction. 

We believe much will hinge on when and how the current suite of geopolitical uncertainties are resolved. 

Zinc pinch-point graph

A ‘pinch-point‘ is the level of inventories of a commodity or product below which consumers of that commodity or product become concerned about security of supply.  When inventories are below the pinch-point, small changes in the balance of supply and demand can cause large changes in the price of the commodity or product.
Inventories are best expressed as a ratio of a period of consumption, say as days, weeks or months of consumption, rather simplistically as tonnes.  That ratio then puts the absolute size of inventory into context with market demand.
Each commodity market becomes ‘tight’ at its own (low) level of inventory. The position of the pinch point curve may shift according to the economics of each cycle, that influence at what level a market is considered ‘tight’.

Teck (20180226) presented data for two recent cycles of tightening zinc markets illustrating that each cycle may travel a different path, but perform a similar pinch-point shape.

Several major zinc mines closed in the last 4-5 years, as their Reserves were exhausted.  To date we have not seen sufficient potential new mine supply to indicate that the closed supply volumes will be replaced in the near term.  There are also no known ‘major’ new deposits able to come on line within the next 6-10 years, the minimum time it takes to discover and develop a new major mine now.  Industry analysts also consider that the sum of all the potential new ‘small’ deposits is insufficient to replace the recent major closures. The outlook for zinc is one of tight supply.

Additionally, for those that believe that the advent of electric vehicle (EV) uptake will mean a near term demise of demand for lead-acid batteries will result in significantly lower prices for lead, the fact that lead is often a co-product or by product of zinc production might reduce the economics of some Zn-Pb mines. This means that confidence in the economics of a zinc mine could be best assured if it is (a) Zn only, or (b) Zn-Cu, rather than Zn-Pb and is reliant on Pb for economic development.  This could mean a shift to a preference for targeting either ‘sedex’ (sedimentary hosted) or VMS (volcanogenic massive sulphide) deposits.

However the range of forecasts for uptake of EVs ranges widely, with some more conservative participants (BHP, Wood Mackenzie et al) forecasting continued growth in Pb-Acid battery demand, albeit slower, to 2030 or 2040, with EVs achieving a 40% share of the global light-vehicle market in those time frames.   Forecasting high growth rates is always difficult, particularly matching high growth forecasts of supply and demand.  We expect the ramp up phase(s) will have volatile pricing.