China’s mutual fund industry is pushing to develop investment products linked to local commodity futures, betting that plans to fight chronic oversupply in the country’s mammoth resource sector will drive up prices for raw materials.
Brazil Will Cut Steel Production
Brazil will produce 32.9 million metric tons of raw steel in 2016, 1% less than last year, as the sector wrestles with a slump in demand amid the worst recession in a generation, the Brazil Steel Institute said on Monday.
The chart below, from Westpac, shows the daily traded volume of Chinese iron ore futures on the Dalian Commodities Exchange back to when the market first came into existence in late 2013.
Day traders have reached a new speculative higher on Dalian iron ore. Source: Westpac.
It’s not the first time the Chinese market was swayed more by sentiment than reality.
What’s Really Going On?
Monitoring daily price movements in the domestic Chinese market (sign up for membership in our IndX if you would like to receive daily prices) gives MetalMiner the opportunity to keep a finger on the pulse of the country’s metals market, so when our editor, Jeff Yoders, remarked on the fluctuating daily prices for iron ore and coal on the Dalian exchange last week, we thought some of our readers may likewise by intrigued to know what is going on. Read more
The speed of the 58% plunge in oil prices since mid-2014 has caught the airline industry by surprise and turned its hedging measures into big money losers.
Delta Air Lines Inc., the U.S.’s No. 2 airline by traffic, racked up hedging losses of $2.3 billion last year, and United Continental Holdings Inc., the No. 3 carrier, lost $960 million. Top-ranked American Airlines Group Inc. abandoned hedging in 2014 and enjoyed cheaper fuel costs than many of its rivals. Delta and United said they have no hedges in place for next year.
Existing Home Sales Fall Sharply
U.S. home resales fell sharply in February in a potentially troubling sign for America’s economy which has otherwise looked resilient to the global economic slowdown.
Our MetalMiner IndX saw positive growth last month in the Aluminum, Copper and Construction sub-indexes and the Global Precious MMI saw a 10% increase. Even the metals that have price increases held their value from February.
While the underlying factors boosting the MMI — Chinese steel production cuts and renewed demand for iron ore and other raw materials — may help the supply/demand picture, we’d still like to wait for more evidence of a sustained turnaround before calling this a bull market.
The oil price recovery was also a big factor in February. Saudi Arabia and other powerful OPEC members are reportedly discussing how to boost oil prices to $50 per barrel.
Despite reports of a Russia and Saudi Arabia-approved production freeze, however, other non-OPEC nations such as Iraq still have not committed to cutting their own oil production. New production from Iran has entered the market at a much lower pace than most expected, but there is also good reason to believe Iran will ramp up production gradually as it deals with the nuances of re-entering global oil trading.
Is this rally really a sustainable for commodities? We operate on the principle of trust but verify here at MetalMiner. And, as my colleague Stuart Burns cautioned us about China’s copper imports, there’s still little to suggest that the purchasing spree there is really about new demand.
Do copper imports matter if they’re not being used? Source: Adobe Stock/Hedgehog.
We’re not the only price rally cynics out there, either. Goldman Sachs isn’t buying it. In a note to investors written by Global Head of Commodities Research Jeffrey Currie, the investment bank cautioned that current market views on “reflation, realignment and re-levering have driven a premature surge in commodity prices that we believe is not sustainable.”
Avoid those unsustainable surges. This week, we noted that the low-price environment has decimated resource-heavy economies such as Africa’s and Brazil. The European Central Bank threw its hands up and cut its principal interest rate to zero, too.
All base metals are up since the year started. Metals such as tin and zinc have made significant gains so far this year while aluminum, copper and nickel are also making some progress.
3-month London Metal Exchange lead price. Source: FastMarkets.
Although lead nose-dived at the beginning of January, prices have made a nice comeback since. But price rallies like this have been usual in previous years only to then be erased as prices trend lower. It will be interesting to see if lead prices can hold above these levels.
January data showed that total vehicle sales in China rose 7.7% from a year earlier. Although the growth looks good, it might shrink in the coming months as China’s weak economic situation could hurt consumer confidence. In the US, auto sales were mixed in January. The number of cars sold was flat compared to the same month last year, although analysts attribute lower sales to fewer selling days this January and a particularly cold month in the populous northeast.
Although these numbers are relevant, lead’s resilience this year is mostly attributed to a weaker dollar. Not only lead, but most base metals have made some upside progress over the past few weeks after suffering significant declines in 2015:
Aluminum just hit a four-month high
Copper is at a four-month high
Zinc is at a four-month high
Tin just hit an eleven-month high
Buyers should keep an eye on the recent strength in industrial metals. We have not yet found out whether this is really just another dead cat bounce or something more meaningful. The outcome will most likely depend on whether the bearish sentiment in China eases or not. Recently, the People’s Bank lowered the amount of deposits that banks must hold in reserve by 0.5 of a percentage point, which seems like another unsuccessful attempt to boost the economy.
Shanghai Composite index hovering near record lows. Source: @StockCharts.com.
For this rally in the metal complex to be extended, investors will probably need to become more optimistic about China. The country’s stock market doesn’t show any signs of that happening yet. Equity shares stabilized in February butt they’re just hovering near record lows. Similarly, oil prices stabilized, but are still far from starting a new, positive trend.
So what is suddenly causing this strength in aluminum prices?
First, before we get too bullish, let’s remember that aluminum prices are still near historical lows. This price bounce comes after significant declines in previous months and, not only aluminum, but all base metals have risen in price recently. However, some indicators within the aluminum industry are giving aluminum producers some reasons to become more optimistic.
China’s Exports and Production Down
In January, China exported 380,000 metric tons of aluminum, down 12% from the same month last year. This is good news for international markets but, to be fair, one month doesn’t tell much of a story and certainly the aluminum exports will have to continue to come down if the aluminum market wants to see a deficit this year.
In January, China produced 2.5 million mt of aluminum, down 4.5% from January 2015. This was the second consecutive month where Chinese aluminum production fell on a year-on-year basis. Aluminum producers are getting quite optimistic on the combination of lower Chinese exports and production.
Surplus or Deficit?
Although aluminum has been in a surplus for almost a decade, there is not a divided opinion on whether aluminum will continue to be in surplus this year or not. Alcoa, Inc. seems the most optimistic of all, foreseeing a record aluminum deficit this year with demand outpacing production by 1.2 mmt. Other producers are less optimistic and major brokerage houses such as Goldman Sachs even have a bearish forecast for 2016, predicting a record surplus this year.
What This Means For Metal Buyers
The trend in Chinese aluminum exports and production is a key factor to watch for the next few months. The slowdown in aluminum exports might have been driven by the steep decline in aluminum prices last year. As prices recover from January lows, we could see an uptick in Chinese exports.
Weakness in the US dollar is another key factor to watch, so is the performance of the rest of the industrial metals. Finally, China’s worsening slowdown has been ignored over the past month, however it could bring the bearish sentiment back. If the Chinese government is unsuccessful in boosting its economy and global economic activity cools off further in the coming months, industrial metals might start to lose the recent upside momentum.
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The World Platinum Investment Council Ltd. (WPIC), an authority on the physical platinum investment market based in London, has brought out its sixth quarterly report appropriately entitled Platinum Quarterly Q4, 2015.
We don’t mind saying it’s a must for anyone remotely connected with or interested in the platinum market. Packed within the 22 pages of the report — produced for the WPIC by independent research house SFA (Oxford) — is an analysis of supply, demand and market trends that, with this sixth edition, builds up an unparalleled level of granular detail on market trends for this most interesting of metals.
What Drives Platinum Demand?
Speaking with MetalMiner, WPIC Director of Research Trevor Raymond threw additional light on the dynamics driving supply and demand for platinum as it reacts to its multiple roles as an industrial, jewelry, investment and green pollution-reducing product.
Just about every authority would agree the platinum market has been in deficit for a number of years, for any other metal this alone would have been enough to support prices, but platinum’s role as an investment product has ironically contributed to it’s price weakness since 2011.
Many had expected the miners’ strike in South Africa to constrain supply so that prices would rise, but a combination of significant producer inventory and a cooling appetite, generally, for precious metals as an investment product led to a net outflow of metal from what Trevor Raymond refers to as liquid-vaulted holdings.
Although ownership of such inventory is understandably opaque, the WPIC probably produces the best estimates of inventory, suggesting above-ground stocks have fallen dramatically in recent years, partiallly fueled by a misplaced investor perception that platinum prices should move in tandem with the wider precious metal market. Also, partially, by the perception that demand is heavily linked to growth in China. Neither of assumption is wholly correct.
Quarterly Platinum Market Report: Existing Supply
By the report’s estimation, inventory has fallen from 4.14 million ounces just a few years ago to 2.315 million ounces today. With the prospect this year of further labor unrest in South Africa over wage negotiations, and the closure of a mine shaft due to fire supply, is expected to reduce output by some 225,000 ounces with only producer stocks able to make up the shortfall, such inventory is likely to dwindle further.
To understand just how crucial South Africa is to the platinum supply market, this graph from SFA (Oxford) illustrates what a crucial role this increasingly unstable source plays, in spite of recently rising supply from Zimbabwe and relatively stable by-product supply from Russia that is linked more to Norilsk Nickel‘s production than sole platinum demand. The world remains heavily reliant on South African supply and, as a result, it is expected to fall in 2016.
Source: SFA (Oxford)
Supply, though, has recovered well since the 2014 strikes, rising 8% overall last year to 7.825 million ounces, mainly on the back of recovering supply from South Africa. But while primary supply increased last year, secondary supply fell as declining metal prices reduced recycling of both jewelry and auto-catalysts. Read more
The common definition of bull market is an increase of 20% from a low and that, to me, is a very bad definition. However, even well-known sources such as The Wall Street Journal or Bloomberg keep using this definition, which only demonstrates a complete lack of understanding of what a bull market is. We saw this when the WSJ called bull market on China’s stock market and last week Bloomberg declared a zinc bull market.
3-month London Metal Exchange Zinc. Source: MetalMiner analysis of Fastmarkets data.
Is Zinc in a Bull Market?
You don’t have to be a hedge fund manager to realize that there is nothing bullish in zinc’s chart. Yes, zinc rose in February and so did other base metals, part of it due to a weaker dollar and the fact that they all deserved a short-term rally after many consecutive months of declines ( also known as bargain hunting).
To me, a bull market means price strength in an atmosphere where funds are creating a tailwind. The kind of environment in which bearish news is dismissed and bullish news is enhanced. An environment that enhances the likelihood of a metal price to continue to rise. In conclusion, an environment where metal buyers want to be hedging/buying forward.
That’s not really the case with zinc. First, zinc is showing momentary price strength after a huge decline, the kind of price strength caused by bargain hunters. Second, the current macro environment doesn’t favor prices continuing to rise. A slump in oil prices, a bear commodity market, China’s widening trade surplus and its ongoing stock market crash are not factors that would favor a rising trend in zinc prices going forward. Moreover, despite some production cuts, there is a lot of zinc sitting in warehouses and off-exchange storage that could also prevent prices from rising.
What This Means For Metal Buyers
If you call bull market every time a metal rises 20% you are going to be right at some point but the definition is useless when it comes to having a good purchasing strategy. The point is to identify when your metal is showing price strength, backed up with strong fundamentals and under a bullish macro environment that will help prices to continue to increase, so you can start hedging. Zinc is just not at that point yet.
The dynamic behind the rise in prices has been a heightened risk aversion and panic over… well, just about everything really. Without fear to drive demand, gold suffers from the cost disadvantage of storage and finance costs but without the corresponding income stream of dividends.
Fear Can Be a Great Gold Price Driver
With Japan becoming the latest country to offer negative interest rates, investors sitting on cash are figuring out the sums on gold carry costs. Adrian Ash, head of research at BullionVault, is quoted as saying: “Negative deposit rates in the Eurozone and Japan are now approaching commercial storage charges on physical bullion, while Swiss Libor and the Swedish Riksbank’s deposit rate already exceed even the higher fees of gold-backed exchange traded funds (ETFs).”
Are gold prices really going to keep rising? Source: Adobe Stock/Nikonomad.
The cheapest major ETF is the iShares Gold Trust, says Ash, which charges 0.25% per year, while the biggest gold ETF is the iShares SPDR, which costs 0.40%. “Commercial storage rates for large-bar gold are nearer 0.10%,” says Ash. Read more