Universal Talent

“I made a lot of money”
Since our last edition, nickel prices on the London Metal Exchange (LME) have continued to fall. They came to a halt at a level of USD 15,800.00/mt. Starting by 26th July they have once more been moving up and the exchange price has now stabilised between the region of USD 16,200.00/mt and USD 16,500.00/mt. This has meant that the landslide price losses on global stock markets have not been reflected in the nickel base metal.

This may be because commodity prices had already seen significant corrections, most especially in nickel, so that there has been sufficient support from the essential production costs. Or the commodity prices did justice to their function of being an early indicator and the stock markets have only ultimately followed what had already been seen in the commodities. In any case, the recent panic on the other markets seems to be somewhat exaggerated.

The risks and dangers of the decades-long zero and low interest policies in Japan have long been well known, just as the unavoidable counter measures of the Japanese central bank are now seen as logical. The indecisive conduct of central banks with regard to interest rate cuts has been reported here for a few months already. And recently the weakening of the US economy is not really news, even if major US banks, such as Goldman Sachs and JP Morgan have now increased the probability of a recession in the USA to 25% or 35% respectively by year end.

The unemployment rate in the United States is at a 3 year high at 4.3%, but migration and the hurricane season also have a special influence here. Yet markets do not always behave rationally, sometimes even panicking unfortunately. And then if the former President and presidential candidate Trump uses hard-hitting language at a press conference praising his own investment decisions as opposed to the Federal Reserve (Fed) then this is indeed the last straw.

In this connection, Trump stated “I think that, in my case, I made a lot of money. I was very successful” implying that he could even take over the job of the Fed governor as well as everything else. At least now it should be known that it is time to take a pause and a deep breath. Knowing that in such a mess market participants need to cool down and soberly analyse matters. Yet, to a certain extent Trump’s criticism can be understood, in that the Fed in the USA and the European central banks have not put themselves in a good light recently.

The problem with the Federal Reserve in the USA is that with an interest rate policy that avowedly follows economic data, it naturally flounders if the data does not more or less move linear in one direction, but more in a yo-yo manner. The Fed is then putting itself under pressure to act at times and then at other times not. And then analysts do also not know what they should be expecting.

While the prevailing view for some time was that there would be a maximum interest rate cut of 0.25%-0.50% by the end of the year, trading in Fed funds futures on 29 July was based on the assumption that it would be up to 130 basis points (BP=1.3%) less. Most recently, the expectation was “only” a reduction of 100 BP. In the meantime, there were even panic-driven calls for an early emergency interest rate cut of 0.50% by the Fed.

Mobility transition is stuttering
In all of this, two important aspects for the market movements continue to remain unnoticed. The development of technology values (for example chip companies in the USA) played a big part in the run-up to the stock market. On the one hand there is an increase of healthy realism after the initial euphoria of artificial intelligence (AI); on the other hand the speed of a reasonable implementation of a change in energy and mobility was greatly overestimated, and not only by the “Green” Party in Germany. Without the necessary funding and further incentives, it does not seem to be working, with the effect that now not only fewer chips are needed for AI, but also for electric vehicles.

This is especially critical for the US economy, as success here, mainly due to the lack of an industrial basis, has also been founded on “bubbles” in recent decades, which do burst from time to time or at the least blow hot air. What begins in the stock markets and in the growth of the general economy continues of course in the commodities. For slower or decreasing sales figures of electric vehicles automatically mean less battery and nickel demand.
Yet this is not necessarily bad news for the nickel price, for fossil driven vehicles in particular require nickel, for example in exhaust systems made with stainless steel. And there is an investment backlog in regard to cleanliness and sustainability for a huge amount of the available battery nickel which, if urgently implemented could support increases for nickel prices which have fallen significantly since May.

In this year, at least up until now, the old stock market saying of “sell in May and go away” would have once again been a successful strategy. On the whole, in the medium term, it does not seem as bad as the present situation on the stock markets is suggesting.

Spain with negative electricity prices
In April, because of high hydro-power production, Spain experienced record low electricity prices and for the first time recorded negative electricity prices. Experts say that this situation could be repeated in future spring seasons due to the growing solar and wind turbine capacities. Prices should, more than other times, be lower in spring, but now necessarily in the other seasons.

The combination of strong winds and higher solar radiation, as well as lower demand, appears to be responsible. Electricity production from renewable energies rose in Spain in April by 21.5 % to almost 13.4 TWh. The market must come to the terms with this new situation of zero and negative prices and high volatility.

However, negative prices could discourage investments in renewable energies, which could bring Spain into a problematic situation. In April Spain added 521 MW of green capacity and is planning to double its installed capacity of renewable energies to 160 GW by 2030. The next two to three years could become problematic since the country will experience more negative prices if demand or storage and transformation (for example in hydrogen) do not increase in order to compensate for the volatility of renewable energies.

What will be the new benchmark for ferrochrome
For almost two decades the quarterly published European benchmark price (EUBM) was important for the price determination of long term contracts and alloy surcharges. Even in the USA and Japan it was sometimes used to evaluate the ferrochrome markets. The most important negotiating partners in the last few years were Glencore on the sales side and Aperam on the purchase side, while Samancor and ThyssenKrupp were sometimes involved too.

Similarly to the LME nickel quotation which also has been criticised, the EUBM benchmark is said by some circles having diverged from market realities. At times significant discounts were agreed upon, which made it difficult to interpret and apply the published EUBM rate. On the other hand, the changes in the course of time, or from quarter to quarter, did have a guiding character.

A recent publication by the commodity trading platform Metalshub discusses how the absence of the EUBM benchmark might offer an opportunity to establish a better pricing mechanism for the European chrome market, which is a more liquid spot market than the EUBM was at the time. For context, it should be added that private data providers, for example S&P Platts, Argus Media and Fastmarkets (subsequently also referred to as price rating agencies) already offer spot price for various ferrochrome products and delivery destinations. The authors from Metalshub see the following options for a new benchmark:

1. Use of the Chinese benchmark, where steel giants such as TISCO, Tsingshan and Baosteel negotiate with suppliers monthly and publish their purchase volumes and prices as a benchmark. The market standards and dynamics differ however from the European.

2. Use of a European index through price reporting agencies (PRAs): PRAs collect data by surveying market participants, but this information is not necessarily precise. It must be seen if the PRAs can accurately reflect the European reality and deliver a reliable benchmark.

3. Use of a digital platform for pricing: Digital platforms enable a modern pricing, whereby trade is digitally handled by independent software suppliers. Transactions are anonymous and standardised, and the risk of distortion is minimised.

The last option would of course also be an opportunity for Metalshub which already offers specific prices on a two week basis. However, Metalshub itself still sees improvement possibilities in regard to transaction numbers.

A fourth option whereby everyone moves to a spot market is also mentioned. However, the enormous risks involving capacity planning were also pointed out. Without a reference price fair and transparent negotiations are difficult. Above all, it holds true in commodities that a regular participation in commodity buying and selling is the best strategy in order to ultimately achieve a representative and fair market price. In this respect, the strategies of consultants for working capital optimisation are not always applicable for raw materials. Experience shows that prices are then at the highest if everyone wants to go through the door at the same time. In this sense a certain amount of stockpiling is, therefore, not yesterday’s old hat. This involves interest costs but ensures in the medium and long term a more favourable average price. Unless the trader can look into the future and his forecast is almost always correct.

Effective price mechanisms are and will remain decisive for a transparent European ferrochrome supply chain. It remains to be seen if and when one of the above options or a combination will pass the practical test.

China’s appetite for metal scrap is growing
The Chinese Ministry of Ecology and Environment has proposed a new policy which has the aim of relaxing import restrictions for metal scraps and, therefore, recognising the significant nature of scrap as a commodity, and at the same time following a balanced approach. In order to increase the usage of metal scrap the authorities plan to reclassify certain alloys and have asked the industry for consultation as they are also mindful of not becoming a global “dumping ground” for waste

In the course of the 2010 decade China had gradually introduced more restrictions on the import of waste, citing environmental concerns and efforts in the development of the processing sector. Beijing had feared that China could become a global landfill site so that finally in 2019 all imports of solid waste were banned. However, the continued growing demand for raw materials in the metals sector prompted Beijing to introduce quotas, licences and a reclassification for certain copper, aluminium and iron scrap to meet production demand.

In July 2024 the government proposed another easing of import restrictions on scrap. According to Mining.com the responsible authority’s draft targets recycled copper, copper alloys, aluminium and aluminium alloy raw materials. These materials should no longer be assessed as solid waste which means the import duties are removed from them.

According to S&P Global, in an effort to cut carbon emissions, reduce energy consumption and decrease dependence on raw materials, the Chinese steel industry is expected to reach 30% scrap utilisation by 2025. The use of scrap as a raw material instead of primary materials can bring steel producers up to 70% or more in energy savings, according to EuRIC, the EU organisation for the circular economy. In view of the prospects for energy and cost savings, the demand for scrap is bigger than the domestic supply in China. In recognition of the crucial value which scrap has for the industry, the change of policy will enable Chinese works to import and utilise more scrap.

Indonesia introduces SIMBARA
Reuters reported that on the 22nd July Indonesia officially introduced SIMBARA, a system to monitor mining. The online tracking system should improve income collection and the supervision of the quickly growing Indonesian nickel and tin sector, which has been hit by corruption and illegal mining activities.

A main feature of SIMBARA is the obligation of nickel and tin producers to record and register all ore purchases. A method of securing licence fees will also be introduced whereby deliveries from mines with outstanding tax debts cannot be unloaded. SIMBARA puts the whole supply chain for natural resources under a standardised management system and, therefore, significantly increases control.

While the main aim of SIMBARA is to generate more state income, according to the Jakarta Post, it was developed following a corruption case in the tin sector, which caused a 17-billion-dollar loss for the Indonesian tax authority. However, it is even more important to combat the increasingly bad reputation of, in many respects, “dirty nickel” and curb illegal mining activities which hamper the Indonesian mining industry.

Since the system is able to monitor production and sales to check for discrepancies, it can alert authorities about possible illegal dealings or tax evasion. This is an important step for the Indonesian industry if it can be enforced effectively, as it has the potential to reduce illegal activities and make the sector more transparent.

Even though SIMBARA can cause higher costs, which could damage Indonesia’s comparative mining advantages, the system addresses the criticism and controversy which has plagued the industry. Finally, SIMBARA can strengthen the practices, the credibility and the reputation of the Indonesian mining industry, which is good for all involved. If then the very high carbon footprint of Indonesian nickel production and also the destruction of the rain forest and nature can be brought better under control, then this is certainly all going in the right direction.