Pandemic is a long-distance run
This year it is difficult to get into any sort of Christmas mood, which is not really much of a big surprise. Whoever thought that the pandemic would be over by the end of the summer has been proven wrong, and we continue to look at quite an uncertain future. Unfortunately this is more of a long-distance run, but one where the length of run is not determined and where the finishing line is even to be found. It all has been totally exhausting already. But then again, there are various vaccination candidates and medical research is being made at top speed. This does give reason for hope, but which the markets have already partly taken into account.
It appears that our Asian friends, with only a few exceptions, have been more successful than Europe and the USA. This could possibly be because they have already had concrete experience with pandemic outbreaks over the years, so have been better prepared for the present situation from the outset. In other words, a pack of 50 surgical masks is to be found in every household in Singapore as a matter of routine. There is also a deeply rooted fear of infections in Asia, so that daily case numbers which can be almost negligible compared to our levels here, are treated there with extreme caution and distancing behaviour.
But somehow, the ambient temperatures and locations seem to have a lot of influence. This would shed a different light on the apparent successes of Germany and Austria in the spring, compared now to autumn and winter. Perhaps a massive piece of luck played its part in the first wave. In any case both these model students have fallen quite a way down the corona medal table.
At the moment it is difficult to know what to do for the best and it’s obviously worrying that the new measures, similar to those of last spring, are not really making much difference. Perhaps, because of good results at the beginning of the year, further preparations, such as for schools and the protection of vulnerable groups, became somewhat neglected. This is often the downside of success. But stock can only be taken at the end of this long haul and there may be many more surprises along the way.
Changes in global stainless steel markets
The nickel market on the London Metal Exchange (LME) is currently getting up to all sorts of antics. Since our last publication, prices were, in the main, stable, but over the last few days there has been a steep increase leading to prices over USD 17,500.00/mt. We have already discussed here the strong nickel demand, but the market is also supported by expectations of a recovery after the pandemic has receded.
It is hoped that inoculations, on a global scale, can be rolled out during 2021 which can lead to some normality again. The stock markets had already developed very well, so that some professional investors have perhaps also made certain shifts in investment, which have had a significant effect on the smaller industrial metal markets. This is underlined by the fact that copper, on the LME, with a price of USD 7,850.00/mt reached its highest level since 2013.
In this connection, it would at first seem surprising that prices for nickel pig iron (NPI) – a class 2 nickel product which is not traded directly on the LME – have fallen recently in China. It seems, however, that in China a strong stainless steel production even in this crisis year has led to a supply overhang in stainless steel. A total increase of 3 % over the previous year is expected. This has now negatively influenced stainless steel prices and, in turn, also NPI demand.
Imports of stainless steel from China had been reduced by the second quarter of 2020 at the latest. Europe has, evidently, achieved an effective protection of the market, so that surplus in production does not flow into other markets. The USA follow a similar policy. It also has to be understood that NPI, which is produced almost exclusively in China and Indonesia using Indonesian and Philippine nickel ores, is also consumed almost exclusively by stainless steel producers in China and Indonesia.
Chinese and Indonesian stainless steel producers appear to have little interest in sharing this commodity with the rest of its global competitors, a commodity which can also be seen as a very important base for cheap raw material supply. Therefore arbitrage between commodity prices in different regions is prevented, and it can indeed lead to falling prices, because of non-commercial allocation, in a generally robust to prospering sector. It remains to be seen how the latest price developments of the LME nickel will affect NPI prices.
Nevertheless it is not surprising that stainless steel scrap prices in Europe are very firm. This is also related to the fact that nickel prices on the LME are pointing upwards. And at the same time, the supply situation is very tight, probably due to certain volume declines, induced by Covid-19, in stainless steel processing. This in turn influences the amount of new scrap becoming available in Europe, while there is still very good demand in the European stainless steel producing industry. In addition China has a growing interest to increase its stainless steel scrap usage, not only for ecological, but also for economic reasons.
So it does now become apparent what was, up to now, little more than just an assumption. Namely, that the Chinese NPI price cannot really be an economically stringent reference for stainless steel scrap prices in Europe. At best, there is a weak indirect link via stainless steel finished and semi-finished products, although protectionist measures cannot come into play. Even if, in the past, consumers eagerly argued that the stainless steel scrap price in Europe should not be higher than the NPI price in China, in order to ensure competitiveness, this cannot be scientifically proven, even though the wish is understandable.
At the time corresponding price reductions could indeed be achieved, but in a phase when normal supply was matched by low demand. This meant that successful negotiations were not always a result of good discussion, but due to the short and medium term regional supply and demand situation. Today things have changed. Stocks of stainless steel scrap are low, and there is nothing in the pipeline. Demand is good. And this is where the LME nickel market enters the picture again. If it is not possible to meet demand with stainless steel scrap and other available Class 2 nickel, such as ferronickel, then Class 1 nickel products, such as nickel cathodes and pellets also have to be used. And their price is determined directly on the LME.
In this respect, theories which try to explain a partition in the nickel market can be considered disproven, as the last ton of nickel determines the microeconomic equilibrium price. This is not to say that there cannot be price differences between nickel products of varying forms and types, but it would be logical for these prices to be derived from the same base, and also generally fluctuate depending on this base. This does, however, presuppose there not being any market distortions, manipulations or trade restrictions as there are for NPI in Asia, already mentioned here.
The latest issue of the Commodities Comment from the commodity and investment bank Macquarie deals with this topic. The question of whether it is possible for class 1 nickel to be made from NPI is discussed. The article also refers to the discussion of a presumed partition in the nickel market, which has, above all, usually been held in regard to class 1 nickel and nickel sulphate, which are necessary for battery production. According to Macquarie a partition today would be more in terms of NPI and class 1 nickel.
The analysis comes to the conclusion that, depending on cost and, therefore, the individual discounts on the LME price for NPI, it is certainly economically possible to convert NPI or ferronickel into class 1 NiSO4 (nickel sulphate). Therefore, there is even a direct correlation to the LME nickel price as a base. If a scientist or an economist reading the article can feel they can provide scientific proof for this also to pertain to stainless steel scrap, then please contact this author.
Iron ore remains excluded in the trade conflict between China and Australia
For some time now, there has been a dispute between the Australian government and the communist led government in Beijing. This has resulted in various measures, such as punitive tariffs on Australian goods or delays on the import of Australian raw materials to China.
Up to now, iron ore has not been affected by the dispute, probably because this commodity trade, for both nations, is the most important. The annual trade volume is about 75 billion USD. Whilst China is globally the largest buyer of iron ore by sea, more than two thirds of these imports originate in Australia. This means that China’s economy, which is focused on infrastructure projects and the building industry, is highly dependent on Australian iron ore.
So far neither party has been prepared to touch this trade. However, the possibility stands that Australia could consider restricting iron ore exports to China as a retaliatory measure. At least then, domestically, Prime Minister Morrison could score points with the voters. It remains to be seen how this dispute can be settled without either party losing face.
Asian commodity traders under pressure
Recently, Fastmarkets reported on the difficult position of some independent Asian commodity traders. Whilst many of these companies flourished in the 2000 decade due to the commodity boom and made huge profits, margins have fallen as a result of the Covid-19 pandemic while risks have been growing. In the past few months, a variety of small to medium sized Asian traders have ceased operations, specifically seeking proximity to the Chinese state or to companies that can provide lines of credit.
This development by Asian traders is happening right in the middle of a global scarcity in availability of credit lines in the commodity financing branch. Numerous international major banks have had to book large valuation adjustments on customer receivables in the past few months. The news portal Fastmarkets points to a study by the business consultant Oliver Wyman, that above all, small traders in particular have difficulties. This is because the very important arbitrage business only works well if a company has reached a critical size, with access to various international markets and producers, and also with a stable supply structure.
The power of words and numbers
The following thought-provoking remarks should be an encouragement for people to think for themselves again, and not to rely on the thinking of others. The choice of stimulating thoughts is, of course, subjective and perhaps also point in a certain direction, but there is always also the freedom not to consider the most obvious conclusion. Sometimes, matters can be complex, but making individual research and reflections, not only in today’s scenario, can at the end be very satisfying, as you will see.
Let us first look at the power of words. In a speech in the Bundestag on the 9th December 2020, Chancellor Angela Merkel stated: “If now before Christmas we have too much contact with one another, and as a result it is the last Christmas spent with grandparents, then we will all have missed something. We should not do this.” Germany’s Federal Statistics Office, Destatis, for the year 2019, recorded 723,437 deaths of people in Germany over the age of 70. So far this year, 20,372 people have died with, or as a result of Covid-19 (status of 10th December 2020).
The World Health Organisation WHO defined health as the following: Health is a state of complete physical, mental and social well-being and not merely the absence of disease or infirmity. The credit insurer, Euler Hermes does not expect an economic recovery back to pre-crisis levels before the 4th quarter of 2022, and so by the end of 2021 insolvencies will rise by 31% and about 20% of short-term workers will fall into unemployment.
Regula Stämpfli, Swiss historian and political scientist, made a very pointed comment in the Neue Zürcher Newspaper (NZZ) on the 9th May 2020. She wrote “The combination of <monocausal narratives> and <virologically based data sovereignty> has created an <age of total certainty>.” Data – or it could be said supported numbers – are “staging” truths, with the ultimate monocausal intention of declaring victory over reality. According to Stämpfli, empirical realities are destroyed with precise calculated conclusiveness so that the difference between fiction and reality is hardly recognisable anymore. She mentions, as example, polls such as those taken in the American Presidential elections. This is, without doubt, heavy to stomach.
And this concludes the reports for this year. They will, of course, be continued in the coming year. We hope you have enjoyed the issues and we would welcome any feedback. We wish all our readers and their families a Merry Christmas and all the best for a Happy New Year. Stay healthy and we hope to see you again next year.
LME (London Metal Exchange)
|LME Official Close (3 month)|
|December 11, 2020|
|Nickel (Ni)||Copper (Cu)||Aluminium (Al)|
|LME stocks in mt|
|November 18, 2020||December 11, 2020||Delta in mt||Delta in %|
|Nickel (Ni)||238,980||243,180||+ 4,200||+ 1.76|
|Copper (Cu)||160,200||146,325||– 13,875||– 8.66|
|Aluminium (Al)||1,409,575||1,329,600||– 79,975||– 5.67|