LME Week – Infrastructure Metals to the Fore

Let the cliché’s flow… a week is a long time in politics, what a difference a day makes, the past is another country but when it comes to mining a year ago it seems like another universe. The last week of October is LME Week which has gone from a humble promotional effort by the London Metals Exchange to become a major jamboree of the Great and Good of the metals trading space, whether their metals are traded on the LME or not. The mood this year was the polar opposite of last year. For those who recall this time last year Glencore was teetering on the brink and Noble was hotly rumoured to follow it down the plughole. Fortunately the fears proved not to come to fruition though the gravity of the situation could not be underestimated. That period also coincided with the five-year nadir of a swathe of metals.

The rest, as they say, is history. The clouds parted and sun’s rays dropped upon the scorched earth and mining markets have been on the mend ever since. Indeed, the near-death experiences of two of the world’s major trading houses seemed to be the cathartic event that was required to turn the mining Titanic away from its date with destiny. Indeed it makes one wonder if the sidelining of these large players was what was needed to turn the market upward. Those who thrive on conspiracy theories have often maligned traders (and big banks) as being the hidden hands that would wish the metals markets ill, even when logic might indicate that higher prices would be better for them.

Whatever it was it did the trick. Closures of mines, particularly in base metals, have been given credit for prompting the recovery, but many of the announced closures never actually happened and there was an element of smoke and mirrors to the whole retrenchment process. Still it seemed to work.

The Chief Takeaways

This year LME Week was bordering on the euphoric but tinged with a sense of trepidation with “easy come, easy go” being the thought on everyone’s minds. Some of the moves had been so sudden and so stunningly good that it was almost too good to believe. The chief things that struck us were:

  • Infrastructure spending is the new mantra with steel potentially being the biggest beneficiary, so much so that we are declaring 2017 to be the year of “Infrastructure Metals”.
  • Companies are frantically attending as many shows as they can, unsure as to who the investors are these days or what they are interested in
  • Loads of unemployed geologists roaming around as money raised is not really trickling down into fieldwork or hiring (yet)
  • Coking coal has soared in value while iron ore has continued to languish (excluding some speculative runs fired by Chinese retail interest)
  • Alloy metals have moved up strongly. Manganese, Chromite, Vanadium and Zinc have done really well and now nickel has also come to the party. Manganese has rocketed and is at its highest level since 2010
  • Electricity industry problems in South Africa have not gone away but low demand for metals has obscured the issue. Now it will come back into play.
  • Antimony has moved up strongly due to a secular decline in Chinese production and the shuttering of many polluting roasters
  • Tin is very healthy these days as alluvial mining in South-East Asia runs towards the buffers. Hand-wringing as to where future production might come from has not generated much interest from miners
  • Lithium has bottomed after a brief sag
  • Someone presented the famous “resources clock” showing that ASX-listed golds, in particular, were on the verge of heading into the overvalued end of cycle period

And some important charts presented by Argus Metals at their event:

Manganese:

mn_ore_price

Vanadium Pentoxide prices rising (Europe up 88.1%, China up 100% YoY):

argus_vanadium

Lithium prices coming off their bottom:

argus_lithium

Antimony picking up again after its swoon:

argus_antimony

Conclusion

There were more than a few who, at times, claimed that the slump of the last five years was the end of mining as we know it. Our response was “cut the drama”. I can vaguely recall the 1970s when many miners on the ASX stayed mired, trading at half a cent for the whole of the decade. My first mining share purchase was around $300 worth of BHP shares in 1981 and they were just over $2 per share.

Mining always comes back and sure as day follows night, the light has dawned. Some have attributed the turn to production cuts but we have suspected that many of the announced cuts and disposals were somewhat fake (maybe the reason why copper took longer to rebound than other metals). Our suspicion is that the real reason for the rebound was that production in China of many metals (e.g. Antimony) is now well past its peak. Meanwhile the Chinese, in rebalancing away from US Treasuries, have been stockpiling or hoarding metals as a store of value. Destocking by corporations around the world has also left many end-users operating on a Just-in-Time basis that has now left them scrambling for material for their processes.

A perfect storm of excess cast the mining industry onto the rocks and holed the ship threatening to send it to the bottom. Now a new high tide is sweeping in and lifting most boats (Uranium and Iron ore being obvious exceptions). LME Week partygoers were right to feel ebullient but after the bitter experience of recent years they were not about to go crazy and start counting on markets evolving as they did under the now defunct Supercycle.




LME Week – Party like its 1999

For those with not too long memories we might conjure up an image of those heady (not in a good way) days of 2008 when attending a conference or investor day in the midst of the turmoil one would find oneself in barely half-filled rooms with those attendees who did show up glued to their phones looking for news of the next financial institution to go over the virtual Niagara.

Until last week, the annual LME Week “festivities” in London looked like they were heading the same way with nervous looking delegates likely to be monitoring the airwaves for signs of mortality at Glencore, the veritable Vatican of base metals trading.

THE GREAT GATSBY

Manna From Heaven?

However on the very eve of the event the gloom was suddenly dispelled by a dramatic turn in the fortunes of Zinc that stunned many players staging its largest one day move since 1989…

The move was attributed to the “baby out with the bath water” action of Glencore in shuttering some mines, including the Lady Loretta mine in Australia. The number of 500,000 tonnes of production being removed from the market was bandied around. Glencore said it would suspend production at its Lady Loretta mine in Australia and at Iscaycruz in Peru. It will also reduce output at McArthur River and the George Fisher mines, both also in Australia and some operations in Kazakhstan. The cuts are expected to result in about 1,600 job losses. The planned production cuts will also reduce Glencore’s output of lead by 100,000 tonnes a year.

Reuters reported that Glencore mined almost 1.4m tonnes of zinc in 2014, and that its planned production cuts are equivalent to about 6.3% of all production outside China.

The theory is that this stores the value in the ground for Glencore thus potentially heightening the sale value should the assets need to be sold off. Many felt that this could help put a floor under the price of the metal, which has fallen to a five-year low on concerns about slowing economic growth in China.

This was “good” news in a fashion but I strongly suspect that there was a strong element of short-covering driving such a dramatic turnaround.

spot-zinc-30d-Large

It should also be remembered though that Glencore has always made more from trading the metals than mining them so anything that gets the price of lead & zinc up puts more bread on the table of Glencore than just running mines at break-even or a loss.

One interesting tidbit I picked up was the suspicion that Glencore had gone massively long Zinc and associated metals, earlier the previous week before it announced its capacity shutdowns. One has to take one’s hat off to them in going long on their own misery!

glencore_price

Official Projections

This appeared to counter and more than reverse the mooted surplus that was announced in the projections of the ILZSG (the trade body for Lead & Zinc). They forecast the global zinc market to have a surplus of 88,000 tonnes this year, but expected to see a deficit of 152,000 tonnes next year. The ILZSG also said that the global lead market is forecast to have a surplus of 97,000 tonnes in 2016, compared to “a close balance” this year. Two large mines, Lisheen (owned by Vedanta) in Ireland and Century (owned by MMG) in Australia, were due to close anyway. Century alone produced about 400,000 tonnes a year of zinc.

And Copper….

In early September, Glencore announced plans to mothball two copper mines in Africa, its Mopani operation in Zambia and the Katanga facility in the Democratic Republic of Congo. Together, Katanga and Mopani produced 127,000 tons of copper in the first half of this year, about 17% of Glencore’s total output of about 730,900 tons. They were both said to be losing money. It claimed it would invest in the mines over the next 18 months to lower long-term production costs while hoping the price recovers.

In any case, Zambia has not been any copper miners favorite place this year as it flip-flopped on mining taxes and royalty hikes.

The closures by Glencore helped put a floor under the price of copper, which is responsible for around a third of Glencore’s earnings. It was noticeable that copper did not suffer falls to the same degree as zinc, in late September.

Other Trends

My attendance at a Non-ferrous alloys event was not exactly cheerful, though the crowd didn’t look too down in the dumps. Most events were liberally lubricated with alcohol in the great English tradition so there was always something to look forward to later that made ending it all with a rusty razor-blade less tempting.

The story was China weakness over and over again. Many found it hard to work out if product was coming into or out of that market. An example was ferrochrome where exports were supposedly rising while things for Chrome itself looked good as China was importing. Manganese was not looking happy and Moly was sick as a dog with even more production coming down the pike from mines where it was a by-product and thus relatively unavoidable. The price now seems so low for Moly that it almost counts as a deleterious compound.

Specialty metals also were on a slide with the wretched FANYA exchange added extra downward impetus to the chief metal suffering from that debacle, such as Antimony, Bismuth and Indium.

Conclusion

Those who can recall 1999 and the end of the last decade of the last century will recall it wasn’t a happy time for commodities. The Tech Boom was sucking the life out of the prices of everything from oil to copper. The rest is history for Tech had its own denouement in 2000 and mining never looked back. In fact, even 2008 was not as bad for prices of metals as the late 1990s had been. It was just that miners had let their costs get out of whack during eth “good times” of the early Commodities Supercycle.

The one phenomenon that paralleled the Supercycle was the rise of the “Rockstar traders”. There were traders before and had been for hundreds of years, but this time they had become almost household names.

Now is somewhat similar. The removal of one or more traders should not do much damage to the industry (though it could to their lenders). It would certainly free up some of the market share that has been overly concentrated.

What is clearly needed is not just an improvement or stabilization in China but also a rebalancing towards the non-Asian economies, and by this we mean the West and developed Asia, rather than just the fairly battered emerging markets. Somehow the oil price slump should start working through to a broader range of economies that have been beggared by high energy prices and China ravaging their industry over the last 15 years. When that rebalancing takes place, then finally the dangerous China-centric mindset that has held miners and traders in its thrall since 2000 will be broken.