GLG News by Paul Glantz

Implications: Base metal prices have been somewhat bearish as of late as have other commodity prices such as oil and gas.  Speculators often react and overreact to daily news items forcing large swings in commodity pricing. However the greatest real effect on commodity prices will be whether Chinese buyers come back strong following the Olympics in August.

Analysis: Base Metal Prices May be at a Turning Point  

Base metal prices have been somewhat bearish as of late as have other commodity prices such as oil and gas. While the US economy has been hurt by the weak dollar, financial institution crises, increase in unemployment, and building slowdowns, the gross national product (GNP) has been steady to even slightly higher. This week, some economic advisors have predicted the world economy will slow down to the same pace as that of the US.  

Speculators often react and overreact to daily news items forcing large swings in commodity pricing. However the greatest real effect on commodity prices will be whether Chinese buyers come back strong following the Olympics in August. Even the lowest prediction for Chinese growth is still at greater than 10% which means Chinese mills will continue to need raw materials, i.e. scrap metal, to keep up with their growth rate. China has been very quiet for the last two months on the buying side but with the commodity prices falling back to more relatively affordable levels the odds are increasing they will begin placing orders which will once again put upward pressure on the scrap prices, and in turn the new metal prices. There remains a possibility that the Chinese mills do not enter the world market as they continue their focus on rehabilitating and restoring damaged infrastructure caused by the earthquake earlier this year. But even here they will need replacement materials which would likely be produced by their own mills.  

If the Chinese mills rev up their production rate once again, there is room for an increase in base metal pricing of 10% (aluminum, copper, iron) to 25% (nickel, zinc) to prices in effect in the first quarter of this year. Typically mill buyers allow lead time of two to four weeks for delivery, so if they intend to begin melting after the Olympics, the orders should begin within the first half of August.

Implications: While reviewing the performance of resource funds for the first quarter of 2008,  I realized that there is now an availability of buying or selling specific commodities for actual users as a 'hedge' against price volatility.

Analysis:

They Have Arrived (Metal ETF’s that is)

In the past, speculators were most likely to purchase or sell futures or options listed on commodity exchanges. New commodity funds have recently emerged that allow speculators to participate in specific materials such as copper and nickel by trading an ETF (Electronically Traded Fund). These transactions are treated the same as a stock.

But, these new trading vehicles now make it simpler for actual buyers and sellers to ‘hedge’ the market to minimize price volatility. I recommend to all my suppliers and customers that handle copper and nickel based products to look into these ETF’s:

iPath DJ AIG Copper Total Return Sub Index:   symbol JJC

iPath DJ AIG Nickel Total Return Sub Index:   symbol JJN

The simplicity and minimal cost of trading these shares lend themselves to a huge increase in awareness and usage. If you have an online account, you can buy or sell each transaction for under $10.

One way to hedge the market is to calculate the element value of the material you want to hedge. For example, if you purchased 100 ton of 18/8 stainless steel for a future delivery, you would have 100 ton X 8% Ni X 2000 lbs/ton or 16,000 lbs of nickel unpriced. In order to hedge the nickel market against an increase in price at the time of delivery, you would need to purchase an appropriate number of shares. On April 25, 2008, the JJN price was $45.84 and the LME Nickel price was $13.11. The appropriate number of shares would be 16,000 X $13.11/$45.84 = 4576. These 4576 shares represent $209,764 of nickel. In this example, there is not a hedge for the chrome or iron values, or any other value added charges.

Another example is if you sold 20 ton of unpriced 70/30 brass scrap, you could hedge the copper value of the brass by selling the appropriate number of shares of JJC. In this example, 20 ton X 70% X 2000 lbs/ton leaves you with 28000 lbs of copper exposure. On April 25, 2008, the JJC price was $55.00 and the LME Copper price was $3.90. The appropriate number of shares would be 28,000 X $3.90/$55.00 = 1985. These 1985 shares represent $109,175 of copper.

Of course, once the actual sale price is fixed, you must buy back or sell the shares to remove the hedged position.

The hedge works this way. Should the value of nickel (or copper) increase or decrease the iPath would increase or decrease by the same approximate percentage. Any loss in the iPath would be offset by a gain or savings in the actual physical sale of those elements, and vice-versa.

The only negative I see to participating in these ETF’s is that you may have to fund your account. If you define it as a hedging account the percentage of funding used to be lower than a regular margin account. Check this out with the broker. However, if this is not a problem, I recommend you set up an account with your favorite online broker, or even an offline broker for a slightly higher fee.

Implications: As published in Recycling Magazine Feb 2007, “Survey of Forecasts”, basemetals.com compiled price predictions of 22 analysts. These analysts are paid researchers that spend their time analyzing the metal markets.   In order to determine the price prediction, in this case in one year, the analyst compiles the list of facts he desires, and computes in a formula and possibly graph detail where the price will be in a predetermined time period.   All the facts are available to all the analysts, yet each come up with a different result. This may be because of the weighting factor each one uses for their determination. Or, an analyst may throw caution to the wind and make a prediction on his intuition.   But, I believe, we have entered a new era of pricing that is much less predictable because of the investment community.

Analysis: As published in Recycling Magazine Feb 2007, “Survey of Forecasts”, basemetals.com compiled price predictions of 22 analysts. These analysts are paid researchers that spend their time analyzing the metal markets.  

In order to determine the price prediction, in this case in one year, the analyst compiles the list of facts he desires, and computes in a formula and possibly graph detail where the price will be in a predetermined time period. All the facts are available to all the analysts, yet each come up with a different result. This may be because of the weighting factor each one uses for their determination. Or, an analyst may throw caution to the wind and make a prediction on his intuition.  

But, I believe, we have entered a new era of pricing that is much less predictable because of the investment community. An exorbitant amount of funds are placed in commodity markets that have more influence on price than the actual seller or consumer of the physical commodity. Principally done by hedge funds, these “players” are betting the commodity price will move in their desired direction. Because of the enormity of these transactions, the simpler supply/demand theory of economics some of us learned in high school is practically discarded.  

Some of my accounts ask for aid in short term purchasing strategy based on price. I generally advise anecdotally on supply and demand situations. I may also use stock inventory as listed in major commodity markets. I can also use chart and graph data. One of the things I do not find readily available is what percentage of trades are done by the hedge funds vs. that by actual users or producers. This issue causes actual ‘physical’ traders to be caught in the tailwind or run over by the price that hedge funds have created.  

While I personally have capitalized on these often higher than rational prices, I still have a problem with hedge funds determining the price. In this marketplace, it seems the fund or funds with the largest position wins. Being right or wrong on analytical pricing has taken a back seat.        

Implications: Being an actual metal trader, selling scrap metal to mills and refiners, I believe I have a unique perspective on the base metals market. When selling scrap to a mill or refinery, the price is most often calculated using a mathematical formula.   Changes to the formula indicate changes in interest, i.e., demand.

Analysis: Being an actual metal trader, selling scrap metal to mills and refiners, I believe I have a unique perspective on the base metals market. I agree the fundamental issues raised by Mr. Buxton of GFMS Metals Consulting should have an effect.

However, most buyers, i.e. purchasing agents, are always interested in purchasing their needed product at a good price. Buyers for mills and refineries are no different.

When selling scrap to one of these customers, the price is most often calculated using a mathematical formula. For example, one our customers is buying #2 copper scrap at the market less 40 cents per pound. The current market of $3.00 for copper means they will pay $3.60 per pound.

My notes reveal the market last August showed the #2 copper scrap to be valued at the market less 65 cents per pound. So, although the market has declined roughly 60 cents, the #2 scrap copper has declined only 35 cents. For those of you that want an easy way to track these differences, the #2 copper scrap price is published in many sources including the “American Metal Market” and the “Wall Street Journal”.

There is more that goes into the creation of the formula, such as the net recoverable value, but the main thought I am going for is that there is much greater interest in purchasing scrap at these lower levels. To me, much greater interest is what spurs demand. Greater demand spurs higher prices. Now, if only the hedge funds let the market work, we should see higher prices in 2008.

Implications: The fp trading desk has made a bold prediction on short term copper prices which expects a price increase of 20% in a matter of one or two months. Their use of recent historic economic data does not tell the whole story.

Analysis:  

The author of this article published in the FP trading desk has made a bold prediction for the short term outlook of the copper price based solely on consumption from China.

What is interesting in this prediction is the missing information with regard to import problems at the Chinese docks which have slowed up orders and receipts of goods to a standstill.

Chinese custom officers have been working off a backlog of approximately 20,000 containers of copper and copper bearing products (as of Aug 10, 2007), as well as an unspecified number of other containers, assumed to be many multiples greater than this amount. For this reason, many, if not most metal importers have been unable to issue orders for Chinese delivery.

Only after there appears to be an easing in this situation as well as other reasons the Chinese government has chosen to slow the growth of their economy will we see a pickup in the volume of business.

Implications: Wheeling-Pittsburg Corp. has been sued for not paying for scrap steel. They claimed the scrap was out of specifcation. Assuming their claim is accurate, under what rule of law do they get to keep the scrap without paying for it?

Analysis: June 14, 2007

Wheeling-Pittsburg Corp. – In the STEAL Business?

In a dispute over scrap metal shipments, Wheeling-Pittsburg Corp. (WP) has been sued for $39 million for scrap steel sold to it by scrap processor Metal Management, Inc. (MM). They were also sued for an additional $18 million by another processor in a dispute over services.

WP, which recently merged with Esmark, clearly has operational problems. They had a loss of nearly $60 million for the first quarter. Among the problems it has, is the way it receives scrap steel, or with the way it communicates with its suppliers, or both. WP claimed that the scrap steel in question was out of chemistry specification, specifically that the copper content was over the maximum tolerance.

Assuming an estimated price of less than $300 per gross ton, WP received or expects to receive over 130,000 gross tons of scrap. To put that in perspective, that is equivalent to 1300 railcar loads (@100 ton each) or 6500 truck loads (@20 ton each). That is a lot of scrap. At what point in their receiving process do they determine the chemistry is out of specification? And when it is discovered, how do they communicate with the supplier?

Should WP make arrangements to return the scrap steel to MM, they should be entitled to a negotiated value resembling the current market value. Under what rule of law, do they get to keep the scrap without paying for it? If they don’t return it or pay for it, WP is in the ‘Steal’ business. If WP incurred expenses for receiving out of spec material, it was their responsibility to notify MM and solve the situation immediately, not wait until payment was due. Esmark has more housecleaning to do.

Implications: The article was right on target. Expect further cuts. India may become more active.

Analysis: The article was right on target. Scrap metal purchases from the major stainless producers were reduced prior to the Memorial Day weekend. As such, the large stainless processors and brokers have reduced their buying prices by an average of 10%.

Expectations are for further cuts should the producers extend their reluctance to purchase additional scrap.

The one thing that could curtail the price drop would be the emergence of additional buyers from other countries. India comes to mind. Indian buyers would be very happy to scoop up additional supply at what they consider to be a "bargain".

Implications:

To review, in a little publicized study published on Copper.org, confirmation of certain desirable medicinal properties of copper and copper alloys were presented. This report was distributed to the association’s membership, but still has not received widespread publication by the media.

However, this week in “This Is London” from the the U.K.’s Evening Standard reports that copper will be put to the test in a real hospital environment. It goes on to state that “If the trial is successful, a wholesale switch to copper surfaces and fittings of hospitals across Europe is in the cards to help cut the death rate from MSRA bacteria infection.

Analysis:

Copper - Can It Save Your Life? Part II

March 15, 2007

The following is a follow up to my report from January 31.

To review, in a little publicized study published on Copper.org, confirmation of certain desirable medicinal properties of copper and copper alloys were presented. This report was distributed to the association’s membership, but still has not received widespread publication by the media.

The main theme of the report was that microorganisms such as the E Coli bacteria and the Influenza virus, of which there are numerous types, and other microorganisms, are “killed” by copper in a matter of hours. The study placed these microorganisms on copper and numerous other materials, including stainless steel, and then compared the ‘life longevity’ of the microorganism. To say that the result was dramatic would be an understatement. E Coli died in 90 minutes on the copper and lived for days on stainless steel in the exact same environment at room temperature. The conclusion reached was that copper “killed” the bacteria.

A subcommittee from the U.S. Congress was scheduled to have a hearing on this issue, at the end of February, but publication of their findings has yet to be released.

However, this week in “This Is London” from the U.K.’s Evening Standard reports that copper will be put to the test in a real hospital environment. It goes on to state that “If the trial is successful, a wholesale switch to copper surfaces and fittings of hospitals across Europe is in the cards to help cut the death rate from MSRA bacteria infection.

The U.K.’s National Audit Office, which is the counterpart for the U.S.A.’s Center for Disease Control and Prevention, estimates 300,000 patients pick up hospital infections annually predominantly from touch plate surfaces. It’s estimated that 5,000 of these patients die from these infections.

The Center for Disease Control and Prevention reports that E Coli, a leading food borne illness, has killed hundreds, and sickened hundreds of thousands since 1999. Last year there were reports that many were sickened and some died after eating lettuce and spinach served in specific fast food restaurants. More alarmingly, between 5% and 20% of U.S. residents get the flu from the influenza virus, of which more than 200,000 are hospitalized, and approximately 36,000 die each year.

The CDA’s report believes that copper may be a cure or prevention for E Coli bacteria, Influenza viruses, hospital acquired infections such as ‘staph’, and other potentially life threatening microorganism caused diseases.

The U.K. has initiated implementation of a test environment. Congress will likely approve a similar funding for testing, or if it is slow to approve, a private funding may be forthcoming. A location for a hospital test site has been rumored to be New York’s Sloan Kettering.

Success, while subjective, will determine the added requirements for copper in everyday life. Knowing the way metal prices fluctuate normally, I wouldn’t want to be in a short position at that time.

Implications: India announced on February 28 that it was initiating a tariff on iron ore of nearly $7 per metric ton.
China’s purchases of 75 million ton of iron ore from India, comprise 23% of its total imports.
Yet, one of the major Chinese importers, Sino Steel, has refused to purchase any new material. Last year they purchased 8.5 million tons.

Analysis:

India announced on February 28 that it was initiating a tariff on iron ore of nearly $7 per metric ton. This constitutes a price increase of 10% to 15%. During these times of high volatility in the metal markets, the extra amount that Chinese steel makers would need to pay doesn’t initially appear to be too overwhelming. China’s purchases of 75 million ton of iron ore from India, comprise 23% of its total imports. This equates to $500 million more. Yet, one of the major Chinese importers, Sino Steel, has refused to purchase any new material. Last year they purchased 8.5 million tons.



Should all Chinese buyers rebuff the higher price, they will be forced to buy ore originating from other countries. The only problem is the supply is limited, and therefore will likely force the price up anyway.

India has been lobbying to become a permanent member of the United Nations Security Council for many years. There are currently only five members: The United States, the United Kingdom, Russia, France, and China. Historically, the United States and China have not supported admitting India as a permanent member. However, the United States has recently altered its stance on India’s admittance, but China still remains opposed. Some say the reason remains a 40 year old grudge between India and China, when during a conflict, China took away part of Kashmir. This created a border issue which remains today.

China and India are the two most populous countries with both having largely accelerating economies over the last decade. One of the backbones to emerging economies is the steelmaking industry. This has helped both Chinese and Indian steel mills to become the major players in the world today.

Implications: Copper has desirable medicinal properties, some of which may kill undesirable microorganisms such as E Coli bacteria and Influenza viruses.

It has been documented that copper has been used since Ancient Egypt to cure numerous diseases and afflictions.

It may be time to bring copper into the environment of certain facilities to diminish and eradicate these diseases.

Analysis:

What would you think if you were told that ordinary copper could save your life?

In a little publicized study presented to the Copper Development Association (CDA) in May through October of 2006, by Dr. Harold T. Michels, confirmation of certain desirable medicinal properties of copper and copper alloys were presented. This report was distributed to the association’s membership, but did not receive widespread publication by the media.

The main theme of the report was that microorganisms such as the E Coli bacteria and the Influenza virus, of which there are numerous types, and other microorganisms, are “killed” by copper in a matter of hours. The study placed these microorganisms on copper and numerous other materials, including stainless steel, and then compared the ‘life longevity’ of the microorganism. To say that the result was dramatic would be an understatement. E Coli died in 90 minutes on the copper and lived for days on stainless steel in the exact same environment at room temperature. The conclusion reached was that copper “killed” the bacteria.

The Center for Disease Control and Prevention reports that E Coli, a leading food borne illness, has killed hundreds, and sickened hundreds of thousands since 1999. Last year there were reports that many were sickened and some died after eating lettuce and spinach served in specific fast food restaurants. More alarmingly, between 5% to 20% of U.S. residents that get the flu from the influenza virus, of which more than 200,000 are hospitalized, and approximately 36,000 die each year.

Needless to say, I was intrigued with this report and decided to do a little research on medicinal properties of copper. I visited numerous internet websites, and Purest Colloids, Inc. has a wonderful history of copper used as medicine. Below is a synopsis of their webpages.

Background

Many civilizations have used copper to maintain and achieve health. In Ancient Egypt, copper was used as a sterilization agent for wounds, drinking water, headaches, and burns. In Greece, Hippocrates, the “father of modern medicine” treated leg ulcers and wounds with copper powder in the form of copper oxide or copper sulfate.

Numerous other civilizations are documented to have used copper in a multitude of forms including Ancient Rome, and the Aztecs. They used it for all of the above ailments as well as eye infections and skin conditions.

In 1885, a French physician, Luton, reported using copper arsenate to treat diarrhea, dysentery and cholera. Interestingly enough, when cholera epidemics were reported in Paris in 1832, 1849 and 1852, copper workers appeared to be immune. The Bayer Company, later used copper in the treatment of tuberculosis until the 1940’s.

Numerous other studies have been performed in the 20^th Century. These included work on cancer tumors in mice. Some reports of success have been documented, where copper has been noted as assisting the decrease of tumor growth. Although it did not actually kill the cancer cells, it caused them to revert to normal cells.

In 1939 Finnish copper miners were unaffected by arthritis. Copper compounds were produced to treat numerous ailments as a result.

Modern medicine now has understanding of the results of copper deficiency. It includes graying hair, skin wrinkles, varicose veins, and saggy skin.

What now?

So here we are. The CDA’s report believes that copper may be a cure or prevention for E Coli bacteria, Influenza viruses, hospital acquired infections such as ‘staph’, and other potentially life threatening microorganism caused diseases.

If this proves to be the “cure of the century”, we could expect to see more copper in places it has little presence now. This would include health care facilities, air conditioning units and ducts, military and public facilities. And this is just a start. One copper distributor has stated that this is potentially an $8 billion industry. I think he is greatly understating it.

Implications:

What’s going on with the copper market?

On a regular basis, I am asked for my opinion on what is happening in the copper industry and/or the copper market. While copper has been all over the news for the last year or so, it is newsworthy mainly because speculators drive the price.

Analysis:

Let’s talk about scrap copper for a few minutes.

Scrap metal sales have been a leading indicator for the economy. When the scrap industry is doing well, the economy soon follows. With that in mind, it’s harder and harder to sell scrap to mills and refiners at last years volume or the published prices. Obviously, the mills only purchase scrap when they are selling new products. The scrap industry logs its sales and profits at least 2 to 3 months before their customers (the mills) do. It seems their order books have been slowing since the 2^nd quarter of 2006, and there are indications they will not improve until the 1^st quarter of 2007.

Two major reasons for the slowing of the volume of copper scrap purchased at mills is the slowing of the housing and automotive industries. One might think that offshore material is taking a larger share of the market, but inadequate proof of that has been presented. Some mills have taken this slower period for much needed maintenance and installation of new melting and rolling facilities, readying their positions for new orders.

Chinese mills have not recently imported substantial quantities of scrap copper and by all indications will not for the balance of the year. Brokers for India consuming mills, and other countries, have sent feelers out to see what is available in the market and may begin placing orders with sellers being squeezed by holding too much inventory.

Inadequate or nonexistent hedging programs are the norm for the scrap industry, and the vast majority of the industry is adverse to speculation. This pressure will release initial volumes of material that won’t be available for those missing the buying opportunity, thereby raising the scrap prices in the long-term.

Implications: In a friendly offer to purchase Phelps Dodge (PD), Freeport-McMoran (FCX) expects to improve its net value for its stakeholders, and determine its own destiny.

I would expect to see huge synergies in the operations, which would save on the expense side of the balance sheet, despite the statement that labor reduction is only a minor part of the agreement.

Perhaps this acquisition is more about two companies with different metal price outlooks and philosophies.

Analysis:

In a friendly offer to purchase Phelps Dodge (PD), Freeport-McMoran (FCX) expects to improve its net value for its stakeholders, and determine its own destiny. Wall Street investors immediately looked to whether it was accretive or not, and FCX, despite the hefty premium of roughly 30 per cent over PD’s closing share price, stated that it was.


I would expect to see huge synergies in the operations, which would save on the expense side of the balance sheet, despite the statement that labor reduction is only a minor part of the agreement. However, FCX will still need a firm copper price to be successful in adding around $18 billion of debt.


Current combined earnings of the two companies would be $7 billion annually less debt costs. Considering their combined annual production is roughly 3.8 billion pounds of copper, at the current rate of production and earnings, the profit on copper alone would need to be sustained at $1.84 per pound. With current production cost by some estimation to be less than $0.90 per pound of copper, this appears to be very do-able. Plus there are other metals produced for no added costs that contribute to the bottom line. Long term market conditions are favorable to copper prices. There seems to be plenty of room for FCX to succeed.


It’s interesting to see that after PD, teaming up with Canadian mining company Inco, failed in its bid to acquire another Canadian mining company, Falconbridge, earlier this year, it was willing to be acquired by a smaller competitor.


Perhaps this acquisition is more about two companies with different metal price outlooks and philosophies. PD wouldn’t raise its offer to acquire Falconbridge because of the inherent risk in metal market prices, felt the valuation was too high, and ultimately not in the best interest of its shareholders.

But FCX does not have the same timidity. In willing to pull the trigger on PD, FCX establishes itself as the leading copper miner in the world, and eliminates perhaps its largest competitor.


Ultimately, it is a good move for both companies. PD has generated a healthy outcome for its shareholders, and FCX establishes its future.