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Commodities Roundup: Aluminum Cools, Department of Commerce Reveals Section 232 Recommendations to Trump

02/23/2018 By

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For the buyers and category managers out there, especially those of you deep in the weeds of buying and managing commodities, here’s a quick rundown of news and thoughts from particular commodity markets.

From price movements to policy decisions, our MetalMiner editors scour the landscape for what matters. This week:

Aluminum Losing Steam

The price of aluminum soared in 2017, but the metal has slowed down considerably of late.

According to MetalMiner’s Stuart Burns: “But having fallen, aluminum prices are making meager gains compared to the robust bounceback in nickel, zinc and copper prices. Indeed, after much hype during the middle part of last year about the impact of China’s environmentally inspired crackdown on legal and illegal aluminum smelting, the price has largely fluctuated within a narrow band off plus or minus 5% since the end of the summer.”

One explanation, according to Burns, is the recent delivery of 250,000 tons of aluminum into LME warehouses.

LME aluminum slid this week, from $2,265 per ton Monday to $2,189.50 on Wednesday, a 3.3% drop.

A British Steel Comeback

Meanwhile, across the pond, Burns writes about signs of recovery in the British steel market, which has suffered from underinvestment by corporate owners Corus and Tata Steel.

But there are now two new contenders vying for market share: the newly formed British Steel Limited and Liberty House.

With that said, Tata Steel has made announcements of future upgrades to British facilities, including a £30 million ($42 million) investment in its Port Talbot plant.

“How this long-term investment plan will shake out following the merger with ThyssenKrupp remains to be seen,” Burns writes. “Many still see Port Talbot as a prime candidate for closure for the enlarged group, particularly if Brexit changes the economics of the plant by putting tariff barriers in place between the U.K. and E.U.”

Section 232 Takes Another Step Forward

The Department of Commerce’s Section 232 investigations of aluminum and steel imports took another step forward last week, when the department released the reports that had already been forwarded on to President Trump last month.

The reports list the recommendations of Commerce Secretary Wilbur Ross. Trump now has until mid- to late-April to decide how to proceed in each case.

Of course, tariffs and quotas are the remedies at the forefront of the recommendation. MetalMiner’s Lisa Reisman and Irene Martinez Canorea broke down the Section 232 aluminum recommendations.

Notably, the department’s stated goal is to increase the capacity utilization rate of both aluminum and steel to 80% (a significant step up from aluminum’s current 48% capacity utilization).

“Of these arguments, some will seek to argue that employment is somewhat less important, as gains in efficiency and productivity could lead to a decline in employment,” Reisman and Martinez Canorea wrote. “But clearly the overcapacity issue in general has forced all but Alcoa and Century Aluminum to declare bankruptcy. By poorer profitability, the industry will not effectively invest in R&D — because it can’t afford to — which will impact future military applications and capabilities.”

Volatility and Commodities

Volatility of the markets has many investors eyeing the VIX, the CBOE’s Volatility Index.

But how exactly does the VIX correlate with commodities? Irene Martinez Canorea surveyed the relationship between the two earlier this week.

“The VIX and the CRB commodities index share a long-term negative correlation,” she wrote. “A negative correlation means that when one index increases, the other tends to decrease. The opposite also holds true. Therefore, when commodities trade in an uptrend, the VIX tends to trade in a downtrend.”

She added: “The recent spike in the VIX does not have a meaningful impact on the CRB index. Buying organizations may wish to use the VIX as another indicator of the commodities trend, particularly for the longer term.”