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Commodities Roundup: The Iron Ore-Steel Disconnect, Gold Prospects and M&A Activity

08/03/2018 By

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:

Iron Ore and Finished Steel

One popular misconception is that the cost of raw materials can be used to predict the price of a given finished product. But that’s not necessarily so, as MetalMiner’s Stuart Burns points out, particularly with respect to iron ore and steel.

“[Iron ore] prices fell this spring and have been bouncing around either side of $65/ton,” he wrote. “However, in China, the world’s biggest consumer, finished steel prices and production have been ripping along.”

Burns added there are signs that steel demand will soften in the second half of this year.

“Ultimately, a softening in steel demand will lead to a fall in steel prices; it is the anticipation of such that is a factor in falling iron ore prices,” he adds.

“As we noted, the correlation in raw material and finished product prices is stronger in falling markets than rising, despite the raw material price falls leading the finished product.”

Meanwhile, in M&A World

The Ohio-based firm Aleris has a buyer.

As Stuart Burns noted earlier this week, despite the failure of a deal with a Chinese group last year, Aleris now has a buyer in Novelis, in what is a $2.6 billion deal.

“Now, with the addition of Aleris, Novelis will acquire some very sophisticated aerospace technology — particularly in the plate market — and further secure the combined group’s position in high-technology products for the aerospace, automotive and defense sectors, not just in the U.S. but globally,” Burns wrote. “Aleris is particularly strong in Europe and has just opened a new rolling mill in China.”

What does the deal mean in both the short and long terms?

“In the short term, the merger of Novelis and Aleris could generate cost savings, technology transfers and adoption of beneficial best management practices,” Burns explained. “In the longer term, it should be seen as positioning a more robust Western market leader against a growing threat from China, eager to compete in higher-value markets and willing to play the long game to get there.”

Global Crude Steel Production on the Rise

According to a World Steel Association report, global crude steel production was up 5.8% year-over-year in June.

Production among the 64 countries reporting to the association amounted to 151.4 million tons (MT) in June. For the first six months of the year, global production (881.5 MT) was up 4.6% compared with the same period in 2017.

In China, production jumped 7.5%. Meanwhile, production in the U.S. hit 6.8 MT, up 0.8% from June 2017.

Global capacity utilization rose to 78.5% in June, continued its rise from 69.4% in December 2017.

Better Days Ahead for Gold?

The gold price has seen better days, but its future might be looking a little bit shinier.

According to a recent World Gold Council report, several factors could contribute to a bounceback of the gold price in the second half of 2018.

Among those, the strength of the U.S. dollar is one piece to monitor, the World Gold Council said. The surging dollar is bad news for gold (as it is for many metals), as the two typically exhibit an inverse relationship. The report opines that global trade tensions could have a depressive impact on the dollar going forward.

In addition, a rise in inflation historically correlates with a rise in gold prices. Gold watchers will want to keep tabs on the PCE Index going forward (especially if it rises above 3%).

Lastly, the report argues gold demand historically tends to be lower in the summer months before picking up again in September. If that trend holds true, a surge in demand would certainly be supportive of the gold price.

Glencore Posts 1H Production Report

Multinational miner Glencore shared its first-half production numbers earlier this week, showing an increase in copper and cobalt production at its global operations.

Own source copper production jumped 8% from H1 2017, according to the company release, powered by a 75% rise in its African copper operations.

Cobalt production, meanwhile, jumped 31%.

However, the miner downgraded its full-year production forecast for coal and lead by 1% and 5%, respectively.

Gold Mining in India

Circling back to gold, MetalMiner’s Sohrab Darabshaw touches on what could be the beginning of a surge in gold mining in India.

The state-owned National Mineral Development Corporation won an e-auction for the rights to a mine in the Indian state of Andhra Pradesh, beating out several big names in the process.

To date, gold mining in India has not exactly been a major industry. However, Darabshaw writes the Indian government is working on formulating a new policy that will promote domestic gold mining efforts.

“Industry experts believe that at least 100 tons of gold can be mined annually in India, from the present level of about 1.5 tons (as compared to China’s 450 tons a year),” Darabshaw wrote.  “Geologists believe that India sits on vast deposits of gold, as the terrain from Australia to China is very similar, so they see no reason why India cannot step up its gold mining.”