Against the Grain

The commodities began Fri with the CRB index looking at its biggest weekly fall in 50 years off 10%; cu its largest decline in 20 years and oil the biggest weekly fall in 4 years as the data points to a significant but not unsurprising economic slowdown. As the base metals fall analysts still appear to be in denial using the notion that the price of most metals cannot fall much further as they are already hovering around cost of production levels. Not being experts we are still not sure how the market arrives at the notional cost of production figure. Secondly we would argue in these circumstances it is demand that dictates price. If you have an al smelter with operating cost of 100 and you are only getting 95 for your product then your loss is 5. However if you halt production you still have fixed costs, forward contracts, care and maintenance, labour costs to cover which could come to 40 with no sales your cost is 40. In these conditions the best alternative seems to continue operations. Finally on the investment front commodities are a bullish world growth asset allocation in times of slowdown they are nothing.

Mon sees the Chinese reappear, though realistically they have been around just their exchanges are closed so no weekly Shanghai data.  Peru reported Aug zn output rose 25.6% yoy to 149 kt as on the same basis cu production declined 0.85% to 108 kt. In Europe the banking crisis is revealing fault lines in the EU as Ireland and Greece act to protect their banking industries without any regard for the community good – with the call every country for itself in a crisis! The UK were banks are hard pressed for cash has seen investors transfer funds to Ireland were they are guaranteed (the newly nationalised Northern Rock is reducing incentives to depositors as they are swamped with funds). The Spt European service PMI figures were better than expected Italy 49.4 (Aug 48.5), France 50.1 (48.0) Germany 50.2 (51.4), Euroland 48.4 (48.5), UK 46.0 (49.2) and Russia 55.5 (55.4). These took some pressure off the € and allowed the metals to recover from the early lows that saw cu at 5680. The LME stocks dominated by rises in al UK 2900, Sing 1450 and US 2725 and zn Johore 7375, on the week cu fell 1.5 kt; al rose 13 kt; zn up 5.5 kt; pb off 900 tonnes; ni increased 1.4 kt and sn off 340 tonnes. The Aug Euroland retail sales rose 0.3% (Jul revised to +0.1% from -0.4%) and -1.8%% yoy (revised to -1.8% from -2.8%), this further boosted the € and helped metal prices, by 10:30 cu was back to its opening level having been as low as 8680 and touched 5885.

The first hurdle in the US was Spt employment data, non farm payrolls fell 159 k well above expectations (Aug -73 revised from -84 k) manufacturing fell 51 k, construction down 35 k, goods producing down 77 k, service providing dropped 82 k, education and health up 25 k and government rose 9 k, unemployment 6.1% unchanged, average work week 33.6 hours (33.7) and average hourly earnings …% (+0.4%). The data left the markets little changed then the US$ strengthened to test € 1.37, gold below 830 and oil under 92 then a stronger DJI rescued things. At 15:00 the Spt non manufacturing ISM was 50.2 (Aug 51.6). The markets remain extremely volatile as the US$ remains below € 1.375 cu broke 5900; oil at 95 and the DJI is up 200 points. At around 18:30 the House of Representatives tries again to pass the TARP bill and the EU leaders meet over the weekend to discuss the financial situation there.

The commodities have been hammered over the week with all in the red cu by 760, al 161, zn 174, pb 245, ni 1750, sn 1055, gold US$ 45 / oz, oil US$ 11 / bbl, the DJI off 320 and 10 year US bonds steady.