AEGIS Factor Matrices: Most important variables affecting metals prices

Most base metals have coughed up earlier price gains in 2022. We have identified several potentially bearish items (and a few bullish items) related to slowing demand and rising energy costs.

Metals Factors

Global Supply/Demand (Mostly Bearish, Surprise) Due to “market conditions and continued high levels of imports,” US Steel has idled its 1.5 million ton/year blast furnace and 140,000 ton/year tin line, both in Gary, IN. The company made these announcements in its 3Q 2022 Guidance press release last Thursday. It is unclear when either plant will resume production. The Gary, IN closure, is the first closure by a US steelmaker due to deteriorating market conditions “in recent memory,” according to Argus. Earlier this summer, US Steel announced it would be temporarily idling its 1.4 million ton/year Mon Valley steel plant for 30 days for routine maintenance. The company “pulled forward” maintenance on the Mon Valley plant from October to September. Similarly, the company “pulled forward” scheduled maintenance on a Slovakia-based plant from October to September.

Citing moral grounds, some European aluminum consumers are hesitant to purchase Russian aluminum, according to Reuters reports from an annual conference held in Barcelona, Spain last week. This conference is part of a traditional “mating season,” where aluminum buyers and sellers negotiate annual contracts. According to one anonymous trader cited by Reuters, Russian aluminum is trading for a $100 to $150/mt discount to LME. Russia’s main aluminum producer, Rusal, was not invited to the conference, but several representatives nevertheless attended, according to Reuters. It is possible the discount on Russian aluminum is evidence of that country's supply being offered at sequentially lower rates, to try to find buyers. The apprehension to seek out Russian metals comes despite a crippling power crisis across Europe that has forced nearly one million mt, or approximately 22% of the continent’s aluminum production, to go offline.

USD/Federal Reserve Policies (Bearish, Priced In). On September 21, the Federal Reserve raised interest rates by 75 bps, putting the Fed Funds target rate to between 3.00-3.25%. Due to the inverse relationship of the DXY and dollar-denominated commodities, this interest rate policy is generally bullish on the DXY, and therefore likely to continue to weigh on CME & LME metals prices.

Energy Costs (Mostly Bullish, Surprise). Regarding Chinese aluminum production, due to a worsening power crisis, aluminum producers in China’s Yunnan province, a key production hub, might cut production by 20 to 30%, or 1 to 1.5 million mt, Shanghai Metals Market stated Thursday, citing a recent producer survey. This revelation comes just days after the local government ordered local producers to curtail production by 10%, or 500,000 mt. Earlier this week, an anonymous source cited by Fastmarkets, proclaimed that deeper production cuts than the initial 10% could occur, as the government plans to ration power until May 2023. At 5 million mt, Yunnan province represents about 12.8% of China’s total aluminum production last year, based on USGS and Fastmarkets data. 

As for CME natural gas prices, fall/winter ’22 & ’23 contracts have fallen from recent highs, but are still trading between $7 to $8/mmBTU. However, summer ’23 prices are near $5.25/mmBTU. Thus, this market is extremely backwardated. This backwardation is favorable to natural gas consumers such as aluminum extruders. This could be a good time for such consumers to hedge future natural gas needs at prices that are well below spot. Please contact AEGIS for specific strategies that fit your operations.

Economic Slowdown (Bearish, Equally Surprise/Priced In). During his speech on September 21, Jerome Powell stated that the economy is likely to slow as the Federal Reserve enacts further interest rate hikes. This will likely weigh on metals prices and demand.

Tariffs (Bearish, Priced In). Regarding the Section 232 tariffs, The Beer Institute proclaims the current Section 232 tariffs on aluminum imports have cost the industry over $1.4 billion since 2018 and have brought no economic benefit to American consumers. These statements were asserted at last week’s public hearings on the economic impact of Section 232 import tariffs on the steel and aluminum industries. During the hearings, the US International Trade Commission heard from consumers and producers of those metals, which have been tariffed since 2018 by the Trump administration. The Beer Institute was especially vocal about the tariffs, saying the tariffs “increase production costs, inhibit investment, and impact consumer prices.”

Section 232 tariffs are at the discretion of the US executive branch and are allowed for reasons of national security. Current tariffs are 10% on aluminum imports and 25% on steel imports. These tariffs were meant to reduce the flow of metals imports, thereby preventing foreign exporters from dumping cheap steel and aluminum onto the US market. AEGIS notes the cost of the tariffs has supported Midwest Transaction Price on aluminum. Reducing or eliminating those tariffs would likely reduce costs and perhaps prices in the U.S, as these tariffs are based on aluminum prices, and are built into the Midwest Transaction Price. The ITC will release findings in March 2023.

Raw Materials (Bullish, Mostly Priced In). Falling demand due to an ongoing manufacturing recession in Europe will lead to a global copper market surplus, thereby potentially weighing on prices into 2023, according to analysts interviewed by Reuters this week. Analysts from Citigroup believe a seasonal surplus will occur between December and March, pushing copper prices to $6,600/mt, a nearly $1,100/mt decline from the current LME 3M Select price. Similarly, Macquarie estimates that the market will swing to a surplus of 691,000 mt next year, compared to an expected deficit of 162,000 mt this year. Macquarie expects a surplus next year despite unchanged production, blaming the surplus wholly on lower demand.