Against the Grain

The US equities rallied late Thurs as the US$ weakened. This caused a sharp rise in base metals during Asian trading led by cu up US$ 100. In Asia, Hong Kong Q3 GDP fell 0.5% (Q2 -1.4%) yoy Q3 GDP was up 1.7% (Q2 4.2%). The Shanghai weekly metal stocks saw cu fall 3141 tonnes to 21,496; al down 5394 tonnes to 198,745 and zn steady at 71,997 tonnes.

The dominant event today is the G20 economic summit in Washington and early London trading saw markets cautious ahead of any announcement. If the leaders needed anymore reminders of the problem facing then it came from European economic data, Euroland Q3 GDP fell 0.2% (Q2 -0.2%) as yoy GDP rose 0.7% (+1.4%); French Q3 GDP rose +0.1% (Q2 -0.3%) and Italian Q3 GDP -0.9% (-0.1%) and yoy -0.5% (-0.3%). Ni dominated the LME stocks as 1512 moved into Liverpool and zn was up with Long Beach taking in 1275. On the week cu rose 19 kt; al jumped 64 kt; zn up 3 k; pb down 400 tonnes; ni up 2 kt and sn rose 375 tonnes. The fall in metal prices is not only affecting listed miners it is reported from the DRC that 41 of the 75 unlisted processors operating in Katanga province have stopped production. The deputy Mines Minister said the government has set up an emergency commission to deal with the effects of the global financial crisis on its economy. In China Huludao Zinc the second-biggest zinc firm by capacity in China, has halted 105,000 tonnes of production capacity, or 27 percent of its total, not 50% as Reuters reported Nov 6.

The US began with Oct retail sales being reported off 2.8% (Spt -1.3%) and ex auto sales dropped 2.2% (-0.6%). The US equities gave back some of y/day’s gain as caution was voiced about Congress passing an auto industry bailout before the new Congress meets in Jan ’09. The preliminary Nov Uni of Michigan consumer sentiment index was 57.9 (Oct 57.6), current reading was 61.4 (58.4) and expectations 55.7 (57.0). A similar pattern to other countries a popular change of leadership cheers people up for a while.

Volatility seems to be subsiding, over the week cu up 65, al off 50, zn rose 108, pb down 11, ni up 100, sn slipped 800, gold increased US$ 12 / oz, oil dipped US$ 4.5 / bbl, DJI declined 300 and US 10 year bond yield unchanged.

The metal analysts remain glued to the supply side of the equation with every mine / plant shutdown assiduously reported and documented. We believe in the present conditions this is the wrong end of the stick, when economic growth recovers it will be a major positive point. For now the curtailment of production is not some measured and wise action by producers it is reacting to a new reality (which has caught them by surprise) therefore expensive and fraught with problems. However for now producers / suppliers have had their day in the sun and now they are back to being price takers not price makers. With a raft of bad news, the US car industry seeking state aid to survive, new ship orders off 90% in Oct yoy, industrial output falling world wide the price driver of metals is demand. Even governments get it as they look for monetary and fiscal stimuli it is not to boost supply but rescue demand.

The Oct Chinese industrial output slowed to 8.2% yoy (Spt 11.4%), crude steel output fell 17% mom and electricity generation down 4% the first monthly decline since Mch ’05. The Oct metals production saw cu output fall 7.2% mom to 294 kt and yoy -8%; al -4.6% to 1.09 million tonnes; zn and pb rose 5.3% and 20% respectively while ni declined 8.9% to 8642 tonnes. Asian markets were under pressure following a fall in US equities as markets reacted to Paulson changing of the goal posts and rising worries about corporate America. On the prices front there seems to be a sea change in opinion as central bankers and economists who talked of a rapid rise in inflation in ’08 turns equally quickly warn about deflation in ’09. Y/day the Governor of the BoE flagged that UK RPI which recently touched 5% could fall below 0% next year. The Indian weekly wholesale price inflation was 8.98% Nov 1 from previous 10.72%. The German Q3 adjusted GDP came in at -0.5% reflecting higher consumption and inventory build, lower exports and rising imports (Q2 -0.4%) yoy +0.8% (Q2 +1.9%). The LME stocks dominated by a jump in al (US 32 k, Europe 6 k, Sing 4375 and Korea 2 k); cu reached Rott; ni into Rott and sn Johore and Sing. The metals then became glued to US$ and oil. In zn, Lundin Mining announced the suspension of zn production at their Portuguese Neves Corvo cu / zn operation, as a dual processing plant they will increase cu output.

The weekly jobless claims rose 32 k to 516 k well above expectations and the highest rate since Spt ‘01. The Spt trade data saw the deficit at US$ 56.4 billion (Aug 59.08) as imports fell 5.6% and exports 6%. News of Obama’s support for an auto industry bail out of US$ 50 billion weakened the US$, boosted equities and supported metals and other commodities. This afternoon Xstrata signalled it was bring forward the closure of some ni mines in the Sudbury region of Ontario.

The non traded commodities are now buckling under the pressure of the global economic slowdown Vale the world’s largest iron ore producer is allowing customers to alter contract without changing the ’08 contract price while cutting production. Rio Tinto has signalled ’08 iron ore output will be 10% below forecast and BHPBilliton Oct exports were down 7.5% reflecting technical problems at a port loader and lower demand.

The general market tone has turned negative in the past 24 hours as markets look to what will rescue the economies, the Russian stock markets were closed y/day for two days as the central bank raised rates 1% to 12% while Pakistan’s stock market remains shut since late Oct and today rates were raised 2% to 15%. Some good news, Chinese consumer demand remained robust in Oct as retail sales grew by 22% yoy (Spt 23.2%), Spt Indian industrial production rose 4.8% ahead of the Deepavali holiday (Aug +1.4%) and Australian Nov consumer confidence improved to 85.5 after an aggressive rate cut (Oct 81.2). However, Japanese consumer confidence declined to 29.4 (Spt 81.2). In Europe UK Spt quarter unemployment rose to 5.8% (5.7% Q2) and Spt Euroland industrial production 1.6% (Aug -0.7%) yoy the fall was 2.4%. The LME stocks saw inflows dominate cu into Rott 2925 and NO 1500; al Trieste 3325, Rott 2250 and Johore 1150; zn Dubai 1850; ni Rott 264 tonnes and sn Sing and Johore. The Chinese will increase tax rebates, cut or eliminate other export duties from Dec 1 on around 28% of products including some steel but base metals not mentioned. In the metals sector the country will increase VAT on metal ore to 17% from 13% effective Jan 1. In Asia Codelco announced it South Korean and Japanese ’09 cu premium at US$ 64 (US$ 99) and US$ 65 (US$ 102) respectively.

The afternoon the metals held in well as US equities weakened and the US$ strengthened. Treasury Sec Paulson today said the government would divert some of the US$ 700 billion rescue plan away from the purchase of troubled bank assets and towards the financial markets which supply consumer credit in such areas as credit card debt, auto and student loans.

The newswires continue to report a plethora of production / investment cuts in the base metal sector, this morning it was the turn of Alcoa who announced they are suspending work on a proposed expansion to the Wagerup alumina refinery in Australia and curtailing present output by 15%. After extensive canvassing it appears that the level of demand in all regions is weak, with parties reluctant to show their hand in frame contract talks for ’09 and this is compounded by the carry over of ’08 material which could significantly reduce ongoing requirements. In China for instance there is talk of businesses are looking to reduce stock and build cash ahead of the Chinese New Year. Talk like this usually begins at the start of a calendar year certainly not this early. While the demand could pick up quickly on any incentive to rebuild stocks the postponement of supply expansion is far more structural and supportive long term.

Looking ahead to this weekend’s G20 economic summit in Washington in the FT is a sound article, Nov 11 edition by Gideon Rachman “The Bretton Woods sequel will flop”, Nov 11 edition (www.ft.com).

Global equities retraced Mon gains overnight as bad news blanked out the longer term prospects of the Chinese stimulus package. In China the Oct CPI was 4% yoy (Spt 4.6%) as food registered its slowest rise since May ’07 +8.5% and non food increased 1.6% (Spt 2%). The Oct trade surplus was a record US$ 35.2 billion as exports rose 19.2% (Spt 21.5%) and imports were up 15.6% (+21.3%). In Australia Oct business confidence declined to -29 in lowest reading ever (Spt -8). Preliminary Oct Chinese metal trade data saw cu imports rise 8.2% at 231 kt and imports year to Oct fell 8.5% at 2.133 million tonnes. Scrap imports rose 6.5% in the year to Oct at 4.841 million tonnes. Ai exports year to Oct have risen 64.9% to 733 kt while alumina imports declined 14.7% to 3.770 million tonnes. The LME stock levels increased with cu Rott 2775 and US 1725) to the fore, al (Rott 1625 and US 1350 in and Busan 1275 out) while pb was up (Hamburg 575 and cancelled warrants at 14% of total). The stock rises were negated by a weakening US$ which encouraged buyers. Good news the Nov German ZEW institute investor confidence index rose to -53.5 (Oct -63.0). The ’09 cu TC / RC negotiations begin this week in an atmosphere of uncertainty as participants try to assess the implications of mine concentrate cutbacks and Chinese smelter output declines (’08 annual TC / RC was US$ 45 and 4.5 c/lb about 25% lower than ’07 while mid year terms were US$ 42 / 4.2 c/lb).

US closed for Veterans Day.

The financial system received another government stimulus package in Asia as China unveiled its widely telegraphed stimulus package (US$ 586 billion) directed at infrastructure and welfare projects. Analysts say the country that accounts for 27% of global growth could benefit next year with a 2% pick up in growth.  We have for some time believed that three guide posts need to be monitored to ascertain how the world economy recovers, to what extent the financial woes debilitate the broader economy; the impact of government and central bank fiscal and monetary policy and lower “food / fuel” inflation. It appears now that the majority of government and central bank stimulus has been flagged (perhaps Obama might act in Jan) now there is the “waiting game” as policy makers see how the medicine goes down. That is likely to mean another couple of quarters of market nervousness.

There was a very positive reaction in the markets cu jumped 8%, the Chinese CSI 300 equity index rose 7.3%, the US$ weakened which boosted commodities. Other Asian equity markets saw strong gains Nikkei 5.8%, Hang Sang 3.5%, ASX 1.4% and India 6%. However as the package has been long expected the price reaction was more muted than it might have been. The Japanese Spt machinery orders rose 5.5% (Aug -4.2%) which softened the Q3 fall to 10.4% matching the biggest drop on record. In Europe French Spt industrial output fell 0.5% (Spt -0.4%) reflecting a weak auto sector while the Italian Spt figure dropped 2.1%. The Oct UK manufacturing input prices fell 5.6% (Spt -1.7%) yoy +13.8% (+24%) and output prices fell 1% (-0.2%) and yoy rose 6.8% (+8.5%). The LME stocks are stuck in the present registering solid rises in cu (again into Rott 2450 and Livorno 1475) and al (closer to China - Busan 12,125).

If a reminder is need of the short term difficulties it came from the US as DHL announced it was cutting 9,500 jobs, the country’s second largest electronic retailer filed for Chap 11 bankruptcy and the AIG bailout package has reached US$ 150 bill. The metals took a leg higher as the US came in with cu above 4170 before a stronger US$ ebbed away the enthusiasm and the equity momentum subsides.

The IMF World Economic Outlook update published y/day gave the following overview “Prospects for global growth have deteriorated over the past month, as financial sector deleveraging has continued and producer and consumer confidence have fallen. Accordingly, world output is projected to expand by 2.2 percent in 2009, down by some ¾ percentage point of GDP relative to the projections in the October WEO. In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the post-war period. In emerging economies, growth is projected to slow appreciably but still reach 5 percent in 2009. However, these forecasts are based on current policies. Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth”. The concern is that they remain too optimistic on emerging markets a point supported by the attached NYT article from David Barboza “Once Sizzling, China’s Economy Shows Rapid Signs of Fizzling” (www.nytimes.com), and the CEO’s of Rio Tinto and BHPB. The next big event is the Nov 15 Washington economic summit where leaders from 20 countries (G20) are meeting. Two apparent risks are there might be too many leaders to get a meaningful consensus and we suspect many will be too busy trying to get the kudos of being the first world leader to meet the President elect rather than concentrating on the job at hand. As someone said to us every world leader is a “lame duck” until they know Obama’s policies.

Asian markets coped well with another steep fall in US equities (the DJI suffered it largest two day fall since Oct ’87). The weekly Shanghai stocks saw cu down 151 tonnes at 24,637; al off 2276 tonnes to 204,139 and zn fell 557 tonnes to 71,997. This morning the US$ and equities are again the determinants.  The LME stock data dominated by cu receiving 2350 tonnes in NO, over the week cu stocks rose 24 kt; al increased 13 kt; zn down 1 kt; pb off 4 kt; ni up 330 tonnes and sn declined 685 tonnes. Bloomberg reports Lloyd’s Register saw global ship orders declined 90% in Oct to 37 vessels from 378 ships in Oct ’07, the full year tally will be a 15% fall (’07 contracts rose 50% to 261.3 million deadweight tonnes) – a considerable impact on base metal demand. In Australia CBH Resources cut zn ore production and reduced the workforce at its Endeavor mine. The Spt German industrial production fell 3.6% (Aug +3.4%).

The Spt OECD area composite leading indicator fell 1.5 points and 6.1 points from Spt ’07 (US -1.9 / -6.6; Euroland -1.4 / -7.3; Japan -0.9 / -2.4; UK -1.4 / -7.5 and Germany -2.3 / -8.6) in the BRIC nations, Brazil -1.6 / unchanged; Russia -2.7 / -2.2; Aug India -1 / -36.6 and Aug China -0.7 / -3.2. In just over a year the world has gone from synchronised growth to slowdown. In the US Oct non farm payrolls fell 242k, goods producing jobs -132 k, construction -49, manufacturing -90, service -108 and government +23 (Spt monster revision to -284 k from 159 k). The unemployment rate 6.5% (6.1%). The metals quickly became US$ surrogate and making matters worse US$ gained and equities up confusing. Just after 15:00 the US$ weakened supporting equities and metals recovered. Then US National Assoc of Realtors said the Spt pending home sales index fell 4.6% to 89.2 (Aug +7.5%).

On the week cu off 344, al drifted 65, zn slipped 33, pb down 144, ni fell 1100, sn up 1300, gold up US$ 9 / oz, oil down US$ 3 / bbl, DJI off 400 points and US 10 year bonds yields declined 0.15%.

To sum up the recent volatility (uncertainty) of the market what better than the movement in the DJI over the past two days, Nov 4 saw the DJI have its largest Election Day points rally in 24 years, 305 points while Nov 5 saw the largest post Election Day fall of 485 points (so far Nov 6 down around 300 points). The latter saw base metals and other commodities fall overnight by a larger margin than reflected in the US$.

The LME stocks saw cu (Rott 2900 and Livorno 2 k – similar inflows to the day before) and al (Vliss 4250, US 1950 and Rott 900) continuing to flow into Europe. On the fundamental front, Rusal bauxite exports from Guinea were halted for two days as fuel price riots in the capital Conakry disrupted rail shipments. The Chinese al producer Chalco reports it has idled 38% or 4.11 million tonnes of alumina capacity. In a rare occurrence of late cash to 3’s cu moved into a small contango. Reuters reports Chinese zn smelter cuts Zhuzhou will cut 20 / 30% of its 400 kt production and Huludao is over 200 kt.

The BoE slashed rates 1.5% to 3% (lowest rate since ’55) while the ECB was more cautious trimming rates 0.5% to 3.5%. The US$ strengthened on the news and metals prices eased back as equity recovered some but not all their lost ground before falling again. The aggressive UK cut will give send out the message that the economy is in far worse shape than has been admitted so far. In the US weekly jobless claims were 481 k from previous 485 k. The Q3 non farm productivity rose 1.1% better than expected (Q2 revised to +3.6% from +4.3%) and unit labour costs rose 3.6% (previous revised to -0.1% from previous -0.5%). The € took centre stage as ECB head Trichet held a post meeting press conference in which he cautioned against further rates cuts by indicating a 0.75% reduction was discussed and inflation remained a worry and the ECB must do what was needed to deliver price stability. In the emerging markets Oct Brazilian motor vehicle sales fell 2.1% yoy and exports -4.8% yoy. In Canada Xstrata has a tentative agreement to end the strike at its Kidd Creek operation in Ontario.

In afternoon trading the US equities lost ground perhaps partly as a result of the Obama team trying to dampen expectations that he would solve all the nation’s problems quickly and easily.  

History has been made Obama is the President elect now for the hard part putting platitudes into practice. In Congress the Democrats increased majorities in both the Senate and House with one of the constitution’s checks and balances remaining is tact, they fail to get the 60 Senators needed to the block filibuster tactic on important legislation and appointments. It is worth getting one thing straight from the outset, the recent bounce in the equity markets is not political but central bank induced. Copious quantities of cash from the world central banks has driven overnight US$ LIBOR rates to 0.375%. If anyone deserves a banking bonus this year it is Ben Bernanke. From reports we are getting the bottleneck is now pressuring banks to support business rather than the more introverted policy of repairing their profit margin (this is the case across the banks from Europe to China). This will be the real test for political leaders going forward.

Overnight a stronger US$ took the shine off y/days broad gains. This morning the Nov LME option declaration pushed some metals around but then the metals to returned to tracking the US$ and equities as the age old selling point of non correlation continues to wither on the vine. The weekly US ABC / Washington Post consumer sentiment index improved to -48 from previous -49 just above the all time low of -51. The Oct UK Nationwide consumer confidence index was 55 lifted by the bank bailouts (Spt 51). Recently we have seen consumer sentiment improve significantly in countries that have seen resounding political change. The LME stocks saw cu rise (Rott 2900, Livorno 2 k and Vliss 750 tonnes) while the other registered small declines. The Oct service PMI data for Europe saw Italy 45.7 (Spt 49.9), France 47.5 (50.1), Germany 48.3 (50.2), Euroland 45.8 (48.4) and UK 42.4 (46.0). Then Spt UK industrial production was reported down 0.2% (Aug -0.6%) yoy -2.2% and manufacturing output fell 0.8% (-0.6%) and yoy -2.3% (-1.6%). The Spt Euroland retail trade fell 0.2% (+0.3%). The world’s largest steelmaker ArcelorMittal will cut global output by 30% (mostly US / Europe) to match falling demand. Around the 11:00 declaration time cu was very jumpy between 3970 and 4025 before getting back onto the US$ rails again.

Ahead of official Oct US employment data Fri, the ADP private national employment report was -157 k much larger than expected (Spt revised to -26 k from -8 k). The Oct US non manufacturing PMI was 44.2 (Spt 52.1). The afternoon was a currency play however the rules have changed overnight. The US economic data continues to be disappointing however the remedy will be fiscal expansion under a new presidency. This will weaken the US$ as the risk of a fiscal blow out adds to worries over the deficit but public spending could increase demand for metals. Commodities came under pressure after US DoE weekly gasoline stocks rose.

It will take an upset greater in magnitude than Truman in ‘48 for Obama not to be the forty fourth President of the US, the key state will be Virginia (result expected 0:00 GMT) if it goes blue then the event is over. Far more important is the breakdown of the Senate, if the Democrats can get over two thirds of the seats then they have the potential power to effectively sideline the Republicans in matters such as cabinet appointments and constitutional change.

One suspects the certainty of a winner and the optimism of it will be supportive of everything to begin with, expects lots of articles beginning with “the historic win by Barak Obama pushed whatever higher” most likely at the expense of the US$. The new presidency will bring hope of change on the economic front as the gloom of depression looms the following by Irwin Stelzer in the Sunday Times, Nov 2 edition is worth noting “A bit of history. In the 1930’s the American economy shrank by 30%, the unemployment rate rose to 25% and prices fell at an annual rate of 10% during the early part of the decade. Since the second world war we have lived through ten expansions, averaging four years in length and ten recessions, with an average length of one year. The two longest recessions (1969-70 and 1973-74) lasted for five quarters and recorded only modest declines, at least by the standards of the Great Depression. That history might provide a bit of comfort to those worried that recessions typically collapse into a 1930’s style debacle”. Time has moved on communications are almost instantaneous and world authorities have many more instruments at their disposal. We continue to believe “main street” is where the pulse needs monitoring.

The financial markets seem to be using the forthcoming election as an opportunity to take stock, equity markets were subdued overnight (the Nikkei rose 6% catch up after Mon holiday), the US$ was slightly stronger which weighted on metals. The dire state of the motor industry was highlighted by Oct US vehicle sales declining to 10.52 million units annually the lowest level in 25 years (Spt 12.44 mill units) and Japanese vehicle sales falling 13.1% yoy (-5.3%). In Australia the RBA cut rates 0.75% to 5.25%. The LME stock pattern is becoming a trend cu (Rott 4 kt in Busan 950 out and NO 4050 cancelled); al (Johore 3225 in); ni (Rott 216 in) are up and falls in pb, zn and sn (Johore 355 and Sing170 out). The latter coincides with reports that China’s Yunnan Tin will cut output 30% in Q4. Reuters’ reports Zambian cu production for the year to Aug rose 12.9% at 377 kt. Reports from China confirm what has been heard on the ground for months, that as much as 40% of China’s refined cu capacity will reduce output as much as 120 kt this year or 2.5% of the expected 4.6 million tonne target. As far back as Jne our Chinese contacts were warning that the country’s consumption could be flat this year. The Spt Euroland PPI fell 0.2% slightly better than expected (Aug -0.5%) coming in yoy at 7.9% (+8.5%). This saw the US$ weaken helping commodity prices move higher led by cu and oil. Today BHPBilliton received from the EU a list of its anti trust concerns with regards the company’s bid for Rio Tinto.

Financial markets are gaining confidence as money market rates fall with US$ LIBOR rates at 2.18% the lowest level in 4 years. This combined with lower logistic charges from oil to freight costs, the Baltic Dry Index has collapsed 93% since Jul (container rates are stickier), trade should commence when banks ease letters of credit restrictions. It seems as if the battered banks are the ones dragging their feet as they try to salvage balance sheets from numerous self inflicted wounds. The DJI was quickly up 200 points as the US$ continued to lose ground and commodities advanced. The US Spt factory orders fell 2.5% much greater than anticipated (Aug -4.3%). Its market impact was limited as financial issues dominated. With stronger equities, lower US$ and firm oil it surprising base metals did not do better.

The base metals seem caught between two competing forces; the first is the US$ and the second the underlying state of the world economy (despite increasing production cut backs prices find it difficult to get traction as demand worries weight). In Asian time a weaker US$ saw cu rally over US$ 150 / tonne from the Fri LME close only to give the gains swiftly back as the manufacturing PMI data below highlighted how weak demand is at present. Blanketing this is a fast moving and bewildering array of government actions - summits, interest rate moves, fiscal incentives and bail outs that are yet to take full effect. In this environment the overriding winner is volatility. Tomorrow see the end of the ’08 US Presidential election campaign which is highly likely see the Democrats in a commanding position of political power, could even be unprecedented.

The Oct manufacturing purchasing managers’ index (PMI) data released today highlights how far and fast the world economy has declined in the past six months. The Chinese private CLSA index was 45.2 (Spt 47.7), official data 44.6 (51.2); India 52.2 (57.3); Russia 49.8 unchanged; France 40.6 (43.0); Germany 42.9 (47.4); Italy 39.7; UK 41.5 (41.2); US 38.9 (43.5) and JPMorgan composite global index 42.5 (44.2). This poor demand scenario was reflected in the ongoing LME stock data pattern with rising cu, al and ni offset by declining pb and sn. The cu increase was into Europe Rott 4 kt and Livorno 2 kt; al moved into Rott 1975, Asia 1125 and Baltimore 1025; ni Rott 402 and sn out of Asia. Cancelled pb warrants are 14% of total stocks. It is reported on Dow Jones Oct German car sales fell 9% yoy (Spt -10%).

The afternoon session it is reported from Ontario that Xstrata and Kidd Creek unions will recommence labour talks tomorrow in an attempt to resolve the strike that began Oct 1. The US Spt construction spending fell 0.3% less than expected (Aug revised to +0.3% from flat). Ahead of US Oct data, Ford reported a 30% fall in sales.