Commodities

Energy prices got hit the most with oil prices falling below $50/barrel, followed by precious metals. Gold prices hit a 5-year low, falling as much as 8% in July, silver of course, followed because metal price correlation is still an important factor to account for.

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The American Institute of Architects’ (AIA) semi-annual Consensus Construction Forecast, a survey of several construction forecasters, is projecting that nonresidential spending will see a nearly 9% increase in 2015, with next year’s projection being 8.2%.

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Vale SA returned to profitability for the first time in a year today and low prices have led to a copper scrap and concentrate shortage in China.

Vale Posts Profit

Brazil’s Vale SA, the world’s largest iron ore producer, returned to profit in the second quarter, bolstered by higher output and cost cuts as it kept up pressure on Australian rivals in the fight for market share.

Three Best Practices for Buying Commodities

The miner overcame a slump in iron ore prices to report a net profit of $1.68 billion on Thursday, moving into the black for the first time in a year. That was a leap of 17.3%from the same quarter a year ago, and more than four times the average forecast of $408 million of six analysts in a Reuters poll.

Copper Scrap Shortage in China

Chinese copper smelters may not get enough raw material after domestic mines and scrap providers scaled down sales because of low prices, which may force some smelters to trim production in the third quarter, industry players said told ThomsonReuters on Wednesday.

Last Chance for the July Metal Price Forecast

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This is your last chance to register for our webinar this Thursday – PREVIEW: MetalMiner™ Price Forecasts for August. Join us at 10 a.m. CDT as Lisa Reisman (CEO, Azul Partners and executive editor, MetalMiner) and John Conolly (managing director, Azul Partners with more than 20 years’ experience in trading commodities) walk you through the creation of our new 30-day metal price forecast, now available as a commercial offering.

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Concern in China is rising that June’s 3.4% fall in auto sales, compared to the year before, could be the start of a trend. After two years of consistent growth and high capacity utilization the world’s largest car market is showing signs of fragility.

Data from the China Association of Automobile Manufacturers quoted in the FT suggests China’s automotive market may be maturing after years of breakneck growth.

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How will US construction purchasing move forward with, apparently, no cost certainty for Highway Trust Fund projects beyond six months?

As House members convened Monday for their final days of work before an annual August recess, Majority Leader Kevin McCarthy (R.-Calif.) ruled out taking up the Senate’s $130 billion highway bill, which cleared a procedural hurdle Monday.

Three Best Practices for Buying Commodities

“We’re not taking up the Senate bill,” he told reporters at the Capitol, adding that the Senate should instead take up the bill passed last week by the House. “My best advice to the Senate is to get our highway bill moved forward,” he said.

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Under Vladimir Putin, Russia bet its future on its abundant natural resources, believing it was irreplaceable as an energy source to the economies of Western Europe.

Three Best Practices for Buying Commodities

Russia pumped oil and gas, nickel, aluminum and other commodities at the expense of building its manufacturing base. With few exceptions, manufacturing suffered at the alter of a strong ruble and, for a time, was flattered by a strong domestic economy playing catch up after years of Soviet waste. The following graph of real effective exchange rate against exports of non-oil goods shows how the strength of currency correlates with falling exports of manufactured goods.

Source Telegraph

Source: London Telegraph

But now, a combination of falling commodity prices, particularly oil and gas, and western sanctions following Russia’s misadventure in Ukraine in 2014, have left the economy in a state of decline. According to the London Telegraph Russia is running a budget deficit of 3.7% which may not sound like much, but for an economy without developed capital markets it shouldn’t be running a deficit at all according to sources quoted by the paper.

Effective Default

Nor is it just central government, a report by the Higher School of Economics in Moscow warned that a quarter of Russia’s 83 regions are effectively in default as they struggle to cope with salary increases and welfare costs dumped on them by President Vladimir Putin before his election in 2012.

“The regions in the far east are basically bankrupt,” the bank Unicredit is quoted as saying. The central bank is burning through foreign exchange reserves initially in a wasted attempt to support the ruble, which has now been allowed to free fall, but the authorities are continuing to support companies having to roll over foreign currency debt as it comes due.

Source Telegraph

Source: London Telegraph

Some $86 billion in outstanding debt is coming due this year and supporting that has contributed to a reduction in official reserves from $524 billion in 2014 to an estimated $340 billion today when various commitments are stripped out.

Economic Contraction

The economy has contracted by 4.9% over the past year and, as oil prices resuming their bear market trend, this is likely to worsen. Half of Russia’s tax income comes from oil and gas, yet output from Gazprom has fallen by 19% this year while revenue is likely to fall by almost a third to $106 billion in the face of falling demand and lower prices. Core inflation is running at 16.7% and real incomes have fallen by 8.4% over the past year, by comparison a far deeper cut to living standards than occurred following the Lehman Brothers crisis.

Source Telegraph

Source: London Telegraph

Gazprom alone generates a tenth of Russian GDP and a fifth of all budget revenues, the paper reports. Oil is an even bigger worry. In volume terms, the spigots are wide open and Russia is pumping nearly 10.7 million barrels per day with the help of a new tax regime but even Lukoil’s vice-president, Leonid Fedun, said in March that Russia’s oil output could fall 8% by the end of next year, taking 800,000 barrels per day out of global markets as a lack of investment fails to reverse the depletion of old soviet era wells.

Free Download: July Metal Price Forecast

Normally that would be enough to rally oil prices, but with Iran about to add twice that to an already over-supplied market the result will likely be lower prices and lower revenue for the Russian economy for years to come.

No Way Out

It is hard to see what the answer is for Russia, with so many of the country’s assets in the hands of so few individuals close to the president, the model is unlikely to change anytime soon. A desperate Russia is potentially a more dangerous Russia and with power in the hands of a small clique it is hard to predict how it will react as the screws of the global commodity market tighten. But, having worshiped at the alter of commodities for virtually all his presidency, Mr. Putin in unlikely to change or be able to change religion in time to avert a more serious deterioration of the Russian economy in the months and years ahead.

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We recently saw short article in the Financial Times arguing that the link among industrial metals is vanishing and that individual metals are now moving more according to their “idiosyncratic fundamentals.”

Three Best Practices for Buying Commodities

In this post, we’ll make a few arguments why we disagree with it:

Correlation is not always a good measure to determine the relationship between metal prices, because short-term price fluctuations can make correlation numbers look worse. The key metric we use at MetalMiner is the direction of the trend, and you just need to take a look at a graph to know what’s going on, no need for correlation metrics.

Aluminum (orange) vs Copper (green) since 2011

Aluminum (orange) vs Copper (green) since 2011. Graph: MetalMiner analysis of Infomine.com data.

The article even argues that copper’s relationship with aluminum has weakened over the past few years. Still, we see a strong relationship between both metals. In the chart above we can see how copper and aluminum have moved together, falling in tandem since both peaked in 2011. Over this four-year period, they only moved differently when aluminum rose during the first half of 2014 helped by an increased use of the metal in the automobile and aerospace industries. That disparity didn’t last too long, as both metals continued falling, recently hitting six-year lows.

Birds of a Feather

Indeed, every single base metal peaked in 2011 and all of them are now at or near multi-year lows. You must be blind to think that the relationship between metal prices has vanished. This close relationship has always been there and remains in place since similar macro-forces drive different base metals in the same way.

This is why our historical studies show that approximately 40% of the individual metal price movements are driven by the general market, another 30% driven by the metal sector and the remaining 30% driven by what is going on with that specific metal.

What This Means For Metal Buyers

Analyzing metals solely by their “idiosyncratic fundamentals” is never a complete analysis. What’s happening with the sector and with commodities across the board is as important, if not more than, as what’s happening with the individual metal. By simply understanding these three forces, you’ll do a way better job at managing your metal price risk.

Free Download: July Metal Price Forecast

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The US House will not vote on the Senate’s six-year transportation bill and China’s economic crisis could cause gold imports to plunge there.

House Won’t Vote on Senate Transportation Bill

House Majority Leader Kevin McCarthy, (R-Calif.), says the House will not vote on the Senate’s six-year highway transportation bill. Funding in the federal government’s Highway Trust Fund will run out on July 31st without any further action.

Three Best Practices for Buying Commodities

The House has already adopted a bill that pays for transportation construction through mid-December. The stumbling block appears to be the provision to reauthorize the Export-Import Bank that’s included in the Senate bill. House members will leave for their August recess on Thursday, and funding for Highway Trust Fund expires Friday. The Senate will be in session next week and could choose to vote on the House bill.

Chinese Gold Imports Hit by Lower Credit Rates

China’s gold imports could fall as much as 40% this year as demand for bullion used to back domestic financing deals decreases, the world’s biggest refiner Valcambi told ThomsonReuters. A lot of the gold China imported in the last three years was used to secure cheaper loans due to a liquidity crunch, but that is now flowing back into the market as lending rates drop there.

Free Download: July Metal Price Forecast

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An interesting if short article in the Financial Times reviewing research carried out by a team at Bank of America Merrill Lynch illustrates something those in the metals markets will have been subliminally aware of but may be not have focused on unless they were truly cross-metals active.

Three Best Practices for Buying Commodities

In recent weeks there has been wholesale weakness across all the metals in the face of fear over global demand, particularly Chinese demand, and concerns about when, not if, the Federal Reserve will raise rates and the impact that will have on the US dollar. A stronger dollar is invariably a harbinger of weaker metals prices as it raises the cost of metals in foreign currencies by virtue of exchange rate, not demand.

Source Bloomberg, re-printed in the FT

Source: Bloomberg, re-printed in the FT

Comparing how metal prices have moved relative to each other over the last ten years to how they have moved over the last twelve months, the bank contends that metals have been, with the exception of the most recent weeks, influenced more by their fundamentals these last twelve months.

Breaking From Metal Price Correlation

In the period prior to the financial crash, links between metals were tighter. The analysis said, “Correlations between metals’ prices were high ahead of the Great Financial Crisis (GFC) and in the immediate aftermath of it. Prior to the GFC, this was heavily influenced by exceptionally strong global economic growth and Chinese demand. Immediately after the GFC, cross-asset correlations remained high, partially because several governments implemented large fiscal stimulus packages and many central banks flooded the markets with liquidity.”

But since the post-crash period, say from 2013 onwards, metal prices have been relatively driven more by their fundamentals. In the last twelve months copper’s correlation with gold is down 11.9%, the bank estimates, and the copper’s relationship with aluminum is 17.8% weaker. Only precious metals have increased, with gold and silver rising from 78.8% over the past 10 years to 81.4% in the last year.

Back to Fundamentals

The trend among base metals is a reflection of the lack of demand and rising surpluses. As investor demand has weakened, supply and demand fundamentals have been allowed to take on more of a role in price determination. A trend that is likely continue for the next two years, as surpluses remain and global demand is muted by lower Chinese demand.

Free Download: July Metal Price Forecast

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