5

Consolidation followed the high in nickel. Overbought situation had to be changed. Rise not just speculative. However, the volume of derivatives is many times more than that of the physical market.

5

The Federal German Government wants a competitive and climate friendly steel production in Europe. Unlike hydrogen, scrap usage is really an universal remedy. A new analysis is needed.

5

Elon Musk needs raw materials for battery production. In almost Trump-like rhetoric he promises a “gigantic contract”. It just has to be economical and of course climate friendly. We shall see.

5

China increases its global share of stainless steel production in 2020. V-shaped recovery gets momentum. Since 2017 Indonesia has gone from zero to one hundred. And this despite trade barriers.

The high is followed by consolidation
After reaching a new high of USD 15,810.00/mt on the London Metal Exchange (LME) on the 3rd September 2020 nickel took a well deserved rest. Prices are said to be consolidating, as the rise happened very quickly and almost linear, which brought rates into what is known as an overbought region. Looking at it from a technical analysis point of view this cries out for a correction. First of all some air has to be carefully released so no artificial bubble is formed which could then burst. But it should not be forgotten that whilst prices were rising, the external value of the US Dollar decreased not insignificantly in the same time frame. This meant that nickel, expressed in other currencies, did not seem as strong. At the moment, however, the good global demand for stainless steel scrap does show that the rise in nickel was not just of speculative nature.

Basically it is always understandable that stainless steel producers wish to push for price reductions in raw materials, but the fact that supply and demand determines the price should also be understood, and not just to an economics professor. And why, when demand is rising and supply is not increasing at quite the same pace, should prices fall, as this defies all the usual economic market logic. Of course, there is also something called negotiation tactics. This does not always have to be rational, but only seldom leads to permanent irrational results. Apart from this, after many years of a buyer’s market for commodity consumers, it can happen that the wind changes bringing a time now more in favour of a seller’s market.

Action concept steel gives an impression of the future
The German federal government recently published the “Steel Action Concept” for a strong steel industry in Germany and Europe. This is significant and gives an impression of how the domestic steel industry could look in the future. The publication can be downloaded from the following link:
https://www.bmwi.de/Redaktion/DE/Publikationen/Wirtschaft/handlungskonzept-stahl.pdf?__blob=publicationFile&v=12.
The English version with the following link: https://www.bmwi.de/Redaktion/EN/Publikationen/Wirtschaft/the-steel-action-concept.pdf?__blob=publicationFile&v=3.

The 24 page concept paper deals with three main aspects. One is that there should be a strong commitment for climate friendly steel “Made in Germany”, often referred to as Green Steel in this context. Another is for the German Federal Government to present an overall political concept for a strong long-term, internationally competitive and climate-neutral steel industry in Germany and Europe. It is also understood to be a commitment from the government that steel, in the long-term, should be competitively produced within Europe while complying with environmental and climate protection standards.

This does not work without equal opportunities in the global steel market and the concept paper, therefore, also deals with how appropriate instruments, such as extensive CO2 pricing and compensation measures at the external borders of the EU, can avoid competitive disadvantages caused by carbon leakage. There is also a chance to pioneer the way to innovative climate protection technologies by converting to a low carbon or even a possible zero carbon steel production eventually.

It is, therefore, not at all surprising that on page 18 of the brochure, under the heading “Promoting the Circular Economy”, the following sentence can be read: “It would be possible in principle to create demand-side incentives for the production of low-carbon, carbon-neutral and zero-carbon basic materials by rewarding the use of steel scrap in materials production.” In other words, there should be a monetisation of the scrap bonus in the form of considerable social welfare gains by avoiding environmental damage, and other advantages which have to be quickly become part of the price mechanism. See also the study “Scrap Bonus” by the Federal Association of German Steel Recycling and Disposal Companies (BDSV).

For the author’s taste, however, the publication and public discussion and communication of the technologies have too much emphasis on the use of hydrogen. On closer inspection, this is probably caused by the existing and historically grown production infrastructure in steel production in Germany and the lobbying of the relevant German steel federation (Wirtschaftsvereinigung Stahl). Traditionally, blast furnaces dominate German steel production, so that the use of carbon friendly steel scrap is technically limited.

This fact has already led to obscure marketing campaigns in the past, whereby a study was supposed to prove that climate friendly products, such as wind turbines, can be made from steel, which is why blast furnace steel is actually an extremely climate friendly material. Now everyone is talking about hydrogen, and indeed it is an option. But the question arises as to whether the use of hydrogen instead of coking coal is really the best option. Production of steel from electric arc furnaces based on steel scrap is already now an extremely climate friendly form of steel production, assuming the use of green electricity.

Market participants should not be condemned here because of their historical infrastructure, or left by the wayside on the path of transformation, but it should be worth considering the evolution to hydrogen in the steel economy by making direct economical and ecological comparisons. There is probably enough steel scrap in Europe, as nowadays, due also to the technical restrictions in the use of blast furnaces, a considerable amount of scrap is exported and so at least ensures global climate protection in other places. If, however, larger amounts of this scrap were used in Europe, then an additional carbon saving would be made by shorter transport routes.

Following a gut feeling, the hypothesis could be formulated that one of the EU supported conversions in the infrastructure towards electric arc furnaces – for example by providing cheaper long-term loans – is superior in both dimensions. Now the experienced metallurgists and steel workers will be crying out that the production of high-quality flat steel is not even possible from scrap because of existing impurities. This has to be countered in that, today, by all accounts, there are already steel producers who make high-quality flat steel from scrap in electric arc furnaces. These include carbon steel manufacturers such as Nucor Corporation in the USA and Arvedi in Italy, and also almost all global players in stainless steel production outside of China and Indonesia.

Of course, the quality of the steel scrap can also be improved, but in Germany and Europe this has sometimes not happened, as the buyers of secondary commodities have not been prepared to pay for these higher quality features, which come with additional expense. Indeed, it would be desirable if an appropriate scientific study could be made to compare blast furnace to electric arc furnace to try to answer these questions. Intuitively, one thing is clear: the future of steel production in Germany and Europe belongs to electric arc furnaces with green electricity, based on the use of steel and stainless steel scrap.

Already heard of the Dunning-Kruger effect?
In the middle of September a very interesting article appeared in the daily newspaper “Rheinische Post” under the title “Even more stupid than expected”. It is about some people being too stupid to even recognise their stupidity and therefore, to all intents and purposes, appear all the more self-confident. The article is with an illustration. It shows a man with a tin hat at a demonstration against corona restrictions holding his mobile telephone in the direction of counter demonstrators. Obviously the author of the article, or the newspaper, would like to subliminally give the readers another conclusion which can be described now as being a little simplistic and banal. But the article is quite superb.

Numerous varied examples can be given of the phenomenon known in science as the Dunning-Kruger Effect, and the confidence syndrome. One example is the bank robber who robbed two banks in Pittsburgh in 1995 but without covering his face. With the help of surveillance cameras the perpetrator was soon caught. During interrogation he admitted that he had rubbed his face with lemon juice and so believed himself to be invisible to the cameras with this “magic ink”. All alcohol and drug tests were negative. The perpetrator was obviously exceptionally stupid. Even when thinking about our own experiences in everyday life, quite a few similar situations or even (public) figures can quickly spring to mind which can relate to this phenomenon.

The stupidity of people knows no boundaries one would like to think. But be careful! The good thing is also that one should never be too confident and too arrogant – and in this point the newspaper article should be amended. For perhaps one does not have the insight to see one’s own absolute stupidity and is just a confidence trickster after all. In this respect, however, such articles and reports are not without danger for the respective authors, as they may actually be the most stupid offenders of all.

The dominance of derivatives
Commodity experts from Macquarie recently examined the size of the derivatives markets for commodities more closely and put each financial product as a ratio to its underlying value. It became clear the derivatives market often exceeds the physical trading volume many times over. For silver the ratio is 193.4, or 193.4 times, for nickel 86.0 and gold 73.5. Aluminium has “only” a ratio of 6.9. The authors justify the different ratios, above all, by the different purchase intentions. Whilst silver contracts are popular with investors, aluminium contracts are mainly bought and sold by companies for hedging purposes.

Furthermore, the authors analysed the open interest of derivatives. The open interest is an index which shows market activity. A high open interest indicates that many contracts are open. A high level of market interest in the individual underlying value can be derived from this. The LME contracts for copper, aluminium, nickel and zinc have the highest open interest.

Elon Musk calls for sustainable mining of nickel
A few weeks ago, the entrepreneur Elon Musk made a call to mining operators to increase their output. During the second quarter earnings call, the visionary even promised a “giant contract” to any company able to extract nickel for battery production in an economical and environmentally sustainable manner with the lowest possible ecological footprint.

Immediately, some media and industry analysts took up the story. The information service Bloomberg pointed out the latest incidents in the industry: The recent accident at Nornickel in Russia and the burst waste pipeline in Papua New Guinea are evidence, according to the news portal, of how difficult it is to mine both ecologically and efficiently. Bloomberg went on to quote an expert who explained that the South Asian nickel mines are run on coal, heating oil and diesel, which make a farce of electro mobility. The commodity experts of Macquarie described the lack of sustainability of the Indonesian nickel industry as an Achilles heel. They went further to say that there might even be a future oversupply, possibly causing mines to actually close. Ultimately, everything depends on the further development and spread of electro mobility.

In the second week of September, the Refinitiv portal reported on talks between Tesla and the Canadian mining company, Giga Metals, about mining nickel with low carbon dioxide emissions at the same time. The mine works on an environmentally friendly method which converts waste from the mining operation into cementitious rock using carbon dioxide in the atmosphere and hydropower. Neither company has made an official statement about any possible cooperation.

China and Indonesia have a worldwide production share of about 67%
The fact that the stainless steel market, especially in Asia, is growing, is nothing new. Numerous statistics continue to prove this. Indonesian stainless steel production in 2017 was almost at zero, whilst towards the end of 2020 it will most probably be an impressive 2.588 million tons, corresponding to a global market share of 5%. China will, also because of coronavirus, further expand its dominance to reach an estimated share of 62%. China’s market share just this year is growing by 5%, as a clear V-curve of recovery can be seen in Chinese stainless steel production. It can be added that this growth is also remarkable as both countries face numerous trade barriers.

 

LME (London Metal Exchange)

LME Official Close (3 month)
 September 21, 2020
  Nickel (Ni) Copper (Cu) Aluminium (Al)  
Official Close
3 Mon.Ask
14,736.00
USD/mt
6,804.50
USD/mt
1,793.00
USD/mt
 
LME stocks in mt
  August 20, 2020 September 21, 2020 Delta in mt Delta in %
Nickel (Ni) 239,304 236,502 – 2,802 – 1.17
Copper (Cu) 104,425 78,425 – 26,000 – 24.90
Aluminium (Al) 1,578,200 1,499,100 – 79,100 – 5.01

Oryx Commodity News

Oryx Commodity News informs about current, industry-relevant topics