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Industrial metals cool as Fed cuts rate, Trump plans more tariffs

Copper and iron ore prices cooled in the week ended Aug. 2 amid signs of a slowdown in global manufacturing and as the U.S. revealed plans to put a 10% tariff on US$300 billion of Chinese goods.

President Donald Trump tweeted that the additional tariffs, as part of a broader trade spat with China, would take effect Sept. 1.

Meanwhile, the seasonally adjusted J.P. Morgan Global Manufacturing Purchasing Managers' Index fell to 49.3, from 49.4 in June, hitting its lowest since October 2012, with trade tensions a factor weighing on international trade.

Additionally, as expected, the Federal Reserve cut interest rates by 25 basis points July 31 in a "mid-cycle adjustment" in an attempt to support the U.S. economy as it also ended a program of shrinking its US$3.8 trillion balance sheet.

Price ring

In the week ended Aug. 2, iron ore prices continued to retreat, falling 11% from the previous week to US$106.51/t. Copper fell 4% to US$5,767/t, while aluminum dropped 2% to US$1,748.50/t. Lead slumped 6% to US$1,949.50/t, while zinc was down 3% US$2,351/t. Nickel gained 3% to US$14,515/t.

In precious metals, gold rose 2% to US$1,445.40 per ounce, building on recent gains. Silver was down 1% to US$16.26/oz. Palladium shrank 9% to US$1,389/oz, while platinum fell 3% to US$841/oz.

Talking points

Steel scrap helped sate Chinese demand in 2018 and may be doing the same this year in a supply constrained market, BMO Capital Markets analyst Colin Hamilton recently noted. Driven by the deadly Feijao tailings disaster, Vale suspended about 90 million tonnes of annual capacity earlier this year, which has since started to come back online.

"Scrap looks to have been a major swing factor," the analyst wrote in a July 31 note. "According to the China Association of Metal Scrap Utilization, 2018 steel scrap consumption was 187.8 million tonnes, up 27.0% [year over year] and equivalent to ~20% of annual Chinese steel output."

Hamilton expects that the growth in steel scrap has flowed through to 2019 with tight supply for iron ore on the back of the Vale tailings dam disaster. Other factors are also at play, he said. "With more severe scrap import restrictions now in place, investment has been made in domestic recycling."

Hamilton sees iron ore prices falling off highs made earlier this year as supply recovers. "We expect the 62%Fe CFR China iron ore price to steadily gravitate towards an equilibrium of US$80/t over the rest of the year."

In the second half, Hamilton expects greater balance in supply and demand for iron ore. The analyst sees Australian exports growing, along with Chinese domestic iron ore production. Steel scrap will also remain a crucial swing factor, Hamilton said.

"The implied call on [Chinese] domestic ore is set to remain high through September, which should alleviate against any dramatic price fall, but as tends to be the case with supply shocks a return to normality sooner rather than later seems likely," Hamilton said.


In larger financings during the week, Freeport-McMoRan Inc. priced US$1.20 billion of senior notes due in 2027 and 2029 in US$600 million tranches at 5.0% and 5.250%, respectively, as it looks to redeem debt that matures in 2021 to 2023.

ArcelorMittal said it plans to redeem US$324.2 million of its 5.125% notes and US$625.6 million of its 5.250% notes due 2020.

Eti Krom A.S., a Turkish ferrochrome producer, brought JPMorgan Chase & Co. on board to help it raise US$250 million in five-year Islamic bonds this year, according to a Bloomberg News report.

Hunan Gold Corp. Ltd. plans to raise up to 600 million Chinese yuan in a debt offering, with maturities no greater than five years, to repay debt and for working capital.

New Century Resources Ltd. secured A$42.5 million in a financing, issuing 128.8 million shares at 33 Australian cents apiece as it expands plant capacity at its Century zinc-lead-silver mine in Australia.