Against the Grain

Bank bail outs were back in the frame overnight as the Fed injected cash into Bank of America to help it absorb Merrill Lynch and in Ireland the government nationalised the scandal ridden Anglo Irish Bank. It could be our imagination but in the UK the news reports seem to have changed their emphasis with regards to loans. Before the New Year it appeared the bank balance sheets were in such a terrible state they could not possibly lend. Now it seems the problem is people / businesses are not approaching them for loans probably convinced by press reports that they would get one.

A good recovery in US equities steadied the markets as saw base metals firmer in Asia led by cu, the only one to post reasonable volume.  The Shanghai weekly stocks saw cu down 6865 tonnes to 15,871; al reversed last weeks fall rising 21,055 tonnes at 187,558 and zn crept up 33 tonnes to 62,111. The state run non ferrous research group Antaike said Chinese pb smelter treatment charges will be US$ 80 / 100 in ’09. In Australia Xstrata warned it could shut the NT McArthur River zn / pb mine by the end of Jan unless it gets clearance from the Australian government to restart mining there. The LME stock pattern continued and on a weekly basis they all increased - cu 28 kt; al 42 kt, zn 14 kt; pb 775 tonnes; ni 120 tonnes and sn 270 tonnes. In Europe Norsk Hydro will cut production of primary al at its Neuss smelter in Germany by 30 kt, equal to 13% of the plant’s annual capacity, by the end of Jan.

During the am rings cu bounced to it high as a Reuters report said the world’s largest cu mine Escondida operated by BHPBilliton has reduced mine concentrate output by 40% as they hit low grade ore this is the equivalent of 520 kt cu in concentrate. The report said this was some kind of scoop however the company production reports have telegraphed this for some time. The afternoon saw US data Dec CPI fell 0.7% (Nov -1.7%) energy prices fell -8.3% (-17%) and food prices off -0.1% (+0.2%) while core CPI was flat (+0.1%). In ’08 CPI rose 0.1% the smallest rise since ’54. Who would have said that back in Jul with oil at US$ 145 / bbl and other commodities red hot. Then Dec industrial production fell 2% more than expected (-1.6%) with capacity utilization at 73.6% (75.4%). Finally, the Jan preliminary Uni of Michigan consumer sentiment survey rose to 61.9 (final Dec 60.1%) with expectations up to 58.8 (52.4).

On the week most of the metals drifted a touch lower cu off 45, al down 105, zn declined 35, pb off 36, ni dropped 1,330, sn down 900, gold declined US$ 24 / oz, oil down US$ 5.3 / bbl, the DJI fell 460 points and US 10 year bond yields fell 0.09%.

The US Fed Reserve Jan Beige Book reported overall economic activity continued to weaken across almost all of the Districts since the previous reporting period. Most Districts noted reduced or low activity across a wide range of industries, although a few Districts noted some exceptions in some sectors. District reports indicate that retail sales were generally weak, vehicle sales were weak or down, manufacturing activity decreased in most Districts. Services sector activity generally declined with several Districts noted weaker conditions in transportation services and slow or decreased demand in tourism activity. Conditions in residential real estate markets continued to worsen in most Districts and commercial real estate markets deteriorated in most Districts, with weakening construction. Agricultural conditions were mixed in response to varying weather conditions while mining and energy production activity generally declined. Most Districts reported a general weakening of labour market with wage pressures largely contained.

Metals were quiet in Asia as the poor economic data kept coming, Nov Japanese machinery orders fell 16.2% (Oct -4.4%) yoy they plummeted 27.7%. No surprise that al stocks at Japanese ports (not part of exchange stocks) rose 18% in Dec to 316 kt that is a 59% rise on the year. It was reported from China Dec foreign direct investment fell 5.7% yoy (Nov -36.5%) for the year FDI rose 23.6% to US$ 92.4 billion with outbound investment up 63.6% at US$ 40.7 billion. There was no let up as Europe opened with the European Auto Manufactures Association reporting Dec new car registrations fell 18% at 924,646 vehicles and for ’08 down 7.8% at 14.7 million units. The LME stocks dominated again by rises al and cu however metals rallied as shorts appear to wing in positions. The sharp pickup in metal prices plateaued just under the levels of y/day’s kerb close. Kaiser Aluminium and Rio Tinto expect to shutter their UK 145 kt Anglesey al smelter in Spt ’09 after failing to agree a new viable power contract.

As widely expected the ECB cut rates 0.5% to 2%. At 13:30 a flurry of US data weekly jobless claims rose 54 k to 524 k cancelling out an encouraging previous decline. Dec PPI fell 1.9% (Nov -2.2%) with core PPI (ex food and energy) rising 0.2% (+0.1%). The Jan NY Fed Empire manufacturing index was -22.0 (Dec -27.88), employment index -26.4 (-23.4) and new orders index -22.81 (-23.51). The US equity markets are again under severe pressure dragging down the metals, oil and gold as the stronger US$ closes the pincer move. After all the bad news a glimmer of hope in some very timely data, the Philadelphia Fed manufacturing index rose to -24.3 (Dec -36.1), better than expected, employment outlook deteriorated as prices received improved. The base metals took most heart from this data led by cu and pb.

It is history but what is now evident is how the financial markets were completely blind sided by two issues in the 1H ’08 namely the “decoupling of emerging markets” argument and the surge of financial investors into commodities that falsely reinforced the first assumption. OECD leading indicators data shows that OECD region industrial production peaked in May ’06 while emerging market growth continued to expand into May ’07 eventually easing by May ’08 as OECD growth was turning negative. The recent Dec ’08 data shows both regions in decline. What is clear from this is that the transfer of manufacturing to the emerging markets has increased not reduced their dependence on growth and now recovery in the developed world economies to keep and now restart their factories. Their own domestic demand is not enough to carry them forward and unlikely to do so in the near horizon. See attached The Times Jan 12 edition by Anatole Kaletsky “Eurozone may be next for a test to breaking point”, (www.timesonline.co.uk).

The weekly US ABC / Washington Post consumer sentiment index was -49 for the third week in succession. In Asia the Thai central bank cut rates 0.75% to 2%. From China it is reported by the state metals research group Antaike that at the meeting between the government and the major zn refineries it was agreed the SRB would purchase 59 kt of zn, below the 200 / 300 kt anticipated. This occurred because they wanted 100 kt but their bid was not accepted. The LME Select cu turnover was still a respectable 1800 lots in a tight range and without the frenzied trading activity. It is reported that BHPBilliton has agreed cu TC / RC rates of US$ 75 and US$ 0.75 c/lb with Japan’s Pan Pacific Copper similar to other agreed rates. London began with all the metals under light selling pressure after the bounce y/day afternoon. The LME stock trend continues with cu and al inflows dominating the proceedings. In Europe the Dec French CPI fell 0.3% (Nov -0.5%) adjusting the annual rate to +1.2% (+1.9%) and Nov Euroland industrial production fell 1.6% (Oct -1.6%) annually it collapsed 7.7% (-5.7%). Metals drifted lower in moderate volumes with little support around.

The Dec US retail sales were awful down 2.7% (Nov -2.1%) with ex auto sales off 3.1% (-2.5%). The Dec import prices dropped 4.2% (Nov -7%) with petroleum prices off 21.4% (-28.5%). This piled sellers into the market. The equity markets have been under pressure all day as in Europe with the FTSE off 200 points and the US followed with the DJI quickly off 150 points. At the same time base metals, gold and oil looked to find a base. Nov US business inventories fell 0.7% more than anticipated (Oct -0.6%).The US weekly oil inventory stocks rose putting oil under pressure as it tested US$ 36. After the close the Fed issues its latest Beige Book ahead of the FOMC meeting on Jan 27 /28 but do not expect a rate cut!

The bad economic news continued to flow freely this morning in China Dec exports fell 2.8% (Nov -2.2%) over the year exports rose 17.2% compared to a 25.7% growth in ’07. Imports fell 21.3%. In the UK the British Chamber of Commerce peppered their Dec survey of members with comments like “frightening deterioration”, awful and the worst since the survey began in 1989 as the British Retail Consortium reported the worst sales in 14 years. In Germany the coalition government agreed a US$ 67 billion economic stimulus package including infrastructure investment and tax relief measures.

The base metals sector saw another wave of supply cutbacks Mitsubishi Materials Corp confirmed it will cut copper production by 10 percent from February. In Australia OZ Minerals is suspending operations at Scuddles zinc mine in WA as it attempts to improve operating costs. It will reduce ’09 zn production by about 25kt to 55-60 kt. Rio Tinto has suspended the underground development at its Northparkes cu /au mine in NSW. In Queensland Xstrata announced changes to its Mt Isa cu, pb & zn complex (’07 produced 172 ktpa cu, 226 kt zn in concentrate and 104 kt pb in cons) the Handlebar Hill zn / pb mine will shut in early Feb and the planned upgrade of the crushing systems at Mt. Isa will not proceed, offsetting these the open-cut Black Star mine will increase output by 38% and production at the George Fisher underground mine will rise 13%.

The Chinese General Administration of Customs released preliminary imports of unwrought and semi-finished cu products up 32%, higher than expected as the cost of imports fell below domestic prices, offsetting the impact of weak demand. Total ’08 cu imports fell 5.1% to 2.64 million tonnes. Iron ore imports rose 6.2% to 34.5 million tonnes with annual imports up 15.9% at 443.56 million tonnes. Asian trading again saw huge LME Select cu turnover with 3235 lots trading before London as the price rose to 3345 up US$ 100 from y/days kerb close before retreating to 3212 at the start of Europe. The recent pattern of LME stock movements continued with al, cu and zn dominating inflows. The metals continued to sell off hitting lows during the late pre market and ring session.

A little piece of good news came from the US as the Nov trade deficit shrank to US$ 40.44 billion significantly below the expected US$ 51 bill (Oct revised to US$ 56.69 bill from US$ 57.19), exports fell 5.8% as imports dropped 12.0%. Metals reacted positively to the news in slow motion gaining momentum as the DJI posted gains. Ahead of the kerb some retracement occurred as the DJI lost ground. However with the recent market action during the Asian session and a meeting between the Chinese government and zn producers expected to discuss the SRB buying zn metal short covering kept prices firm, despite a stronger US$. Asia accounted for 30% of the Select cu turnover.

The base metal trading seems to be dominated by the cu arbitrage (LME / Shanghai) this is reflected in high LME Select volumes in early Asian trading and the spate of limit moves in the Shanghai contract. The conditions for this activity has been created by China dominating the fundamental news as western mines cut output changes in Chinese taxes and trading regime leave it as the last outpost of possible demand. Talk of the state Strategic Reserve Bureau (SRB) buying cu has helped to build the expectation of Chinese demand (Bloomberg is running a story saying the Chinese authorities have decided not to buy cu as smelters are still profitable and the market pretty tight). This is creating quite violent moves as London and NY sleep, Fri we reported cu rallied US$ 250 in Asian time before giving US$ 150 back in London then a late rally as traders positioned themselves ahead of the next Chinese session. They were correct to do so as last night cu moved up US$ 120 from the London Fri 17:00 close to US$ 3520 only to give it all back by London 08:30.

There is little economic news around while specific to metals zn seems to be in the frame as Reuters reports the Chinese government will meet the zn smelters Jan 14 to discuss the SRB buying 200 kt of metal to support them at these low prices. Maybe this says more about how weak the market is rather than adding support. The Nov Indian industrial production rose 2.4% (Oct -0.3%). The LME stock movements saw all the metals delivering material in dominated by al (globally) and cu (Europe and US). Sellers quickly in control on the LME as cu tested 3300 and prices slipped further as the morning progressed. The Nov OECD composite leading indicators (CLI) reinforced the data signifying a deep global slowdown – the OECD area LEI decreased 1.3 points and down 7.3 points since Nov ’07 (US -1.7 / -8.7; Euroland -1.1 / -7.6; Japan -1.6 / -5.5 and UK -0.6 / -6.7). The deceleration was even more pronounced in the BRIC nations (China -3.1 / -12.9; India -1.2 / -7.6; Russia -4.3 / -13.8 and Brazil -1.1 / -2.9). The LEI attempt to indicate turning points in economic activity approximately six months in advance. There is no other economic data out today.

As the pre market ended cu was testing 3200 with the other following on a stronger US$, weaker gold and oil. With little news this afternoon the metal markets built a base just above the lows established in late morning trading. Interesting Asia accounted for over 25% of the LME Select cu turnover on the day.

A proposal overnight by the China Nonferrous Metal Association that the government buy cu, zn and ni for state reserves to support the industry in this period of weak prices saw cu bolt US$ 250 / tonne in heavy volume of over 3500 lots on Select. By 08:30 London time it had give back US$ 150 while the others were little moved. The cu volume has been high throughout the week as traders jockey for positions. The weekly Shanghai stocks saw cu rise 4914 tonnes to 22,736; al tumbled 37,030 tonnes at 166,033 and zn dipped 538 tonnes to 62,078. Looking at Obama economic speech it seemed long on rhetoric and light on substance while many of the proposals could take months to implement. Don’t take our word see attached what an Nobel prize Obama supporting economist say “Obama Gap” NYT January 9 edition (www.nytimes.com).

There was activity in South Korea, the central bank cut rates 0.5% to 2.5% a record low as the car maker Ssangyang went into receivership to avoid bankruptcy and on the good news side Hyundai Heavy Industries and two other shipbuilders indicated they would increase steel plate purchases by up to 11% or 7.8 million metric tonnes. Nov Japanese leading economic indicators was 81.5 (Oct 85.2) and coincidental 94.9 (97.7). The Indonesian Trade Minister has announced that starting Mch 5 the country will insist on letters of credit for the export of key commodities to cover the risk of payment default this will include base metals. Routine LME stocks saw cu rise 23 kt over the week, al jumped 68 kt, zn increased 6 kt; pb off 125 tonnes; ni declined 228 tonnes and sn rose 210 tonnes. In Africa talks are taking place between the Zambian government and DRC Katanga province over cross border cu concentrate exports (banned by the DRC in ’07) and joint infrastructure improvements. In Europe there was some Nov economic data which in this fast moving times perhaps the good news is best Euroland sales rose 0.6% (Oct -0.8%) and yoy -1.5% (-2.1%). The UK Dec input PPI declined 2% (Nov -3.3%) yoy +4.3% (+7.5%) and output PPI flat (-0.8%) yoy +4.7% (+5.1%).

The US Dec employment data saw non farm payrolls fall 524 k in line with expectations (Nov revised to -584 from -533 k) and unemployment 7.2% (6.8%). In the major sectors goods producing lost 250 k jobs; construction 101 k and service producing 149 k with education and health rising 45 k and government up 7 k. The total ’08 job loss was 2.589 million the most since 1945. The US$ strengthened, equities advanced while commodities milled around in tight ranges. Prices drifted before the rings then recovered led by cu as it appears traders do not want to leave themselves short ahead of Asian trading and end of week index reweighting appeared. The late rally is similar to the move last Fri.

Over the first week of ’09 cu up 169, al eased 10, zn up 13, pb rose 103, ni fell 1025, sn up 175, gold fell US$ 17 / oz, oil off US$ 5.9 / bbl (the nearby price is under pressure because of a dearth of storage Feb ’10 oil is trading at US$ 59.3 / bbl), the DJI eased over 300 points and US 10 year bond yields rose 0.11%. A week when equities fell and bond yields rose, not a good omen.

Since late Dec crude oil has moved higher on a number of supportive factors, violence in the ME (away from the oil producing areas), OPEC output cuts, the Russian / Ukraine gas dispute, anticipation of commodity index fund reweighting and a better feel good factor. All issues that focused on the supply side of the equation. Then y/day afternoon US weekly crude inventories were reported up 6.7 million barrels or 2% at 325.4 million barrels, highlighting the weak demand environment as stocks approach their highest Jan levels in nearly a decade. The price eased 12% in NY before recovering a little as rockets hit northern Israel from Lebanon. This is a good example of why we believe the market must focus on demand recovery to signal an improvement in commodities.

The base metals fell in Asia as y/day’s selling worked its way through the system with weaker equities adding to the pressure. In Korea LS Nikko, the second largest cu smelter will cut output by 10% in ’09 to 515 ktpa. In London prices steadied as oil found support in nervous trading. Today is apparently the official start date for index funds to reweight, which is perhaps rather like Botox after Christmas, it has a short term effect but cannot change the march of reality. The LME stock data again dominated by inflows of cu (Rott 4875 & Busan 1 k); al (Asia 9125 and Europe 12,425) and zn (Sing 3835 and Johore 1150). The European economic data was not encouraging German Nov exports fell 10.6% yoy (Oct -0.6%); Q3 Euroland GDP was confirmed at -0.2% then Dec EU consumer confidence came in at -30 (Nov -25), economic sentiment was 67.1 (74.9) and industrial confidence -33 (-25). The Euroland Nov unemployment was 7.8% (Oct 7.7%) and Nov German manufacturing orders fell 6% well over expectations (Oct -6.1%).

The BoE cut rates 0.5% to 1.5% which sparked a recovery in the £ stg. Base metals caught between reweighting and poor data moved sideways. The only US data was weekly jobless claims that were 467 k against previous 492 k. Obama delivered a pretty bleak economic assessment without breaking new ground, what remains to be seen is his specific programme that Congress can vote on.

The Russian bear settled down for the Orthodox Christmas with its old satellites shivering in the cold and a reminder to the EU of its growing clout in their energy equation. With everything that has happened in the first week of Jan we wanted to share this cartoon by the great cartoonist Peter Brooks of The Times Jan 07 edition to raise a smile (www.timesonline.co.uk). See attached an FT article from by the Goldman Sachs economist who coined the BRIC acronym about their prospects in ’09 “Why it would be wrong to write off the Brics” (www.ft.com).

The US$ weakened in Asia and Europe after Obama warned of “trillion dollar deficits for years to come” as he prepares to unveil his long awaited stimulus package and Fed minutes signalled rates to remain low for the foreseeable future. The weekly US ABC / Washington Post consumer sentiment index was steady at -49. Base metals were again on the boil in Asia with cu touching 3570 in early London as a wave of fund buying and short covering swept in. Helping this was further production cuts, Alcoa announced a third production cut in consecutive months reducing capacity by 750 kt or 18%, this was accompanied by a 13% reduction in its workforce and 50% cut in capital expenditure. In Australia Aditya Birla will halt cu mining at Mt Gordon underground operations and suspend crushing and stacking at the Nifty oxide operation. Japan’s third largest cu producer Mitsubishi Materials is considering cutting output by 10%. The company will produce 310 kt in Japan and 250 kt at its 60% owned PT Smelting in Indonesia in the financial year to Mch 31. This follows the Jan 5 announcement by Sumitomo Metal Mining Co to cut production by 7% to 210 kt for six months from Mch 31 and in Dec Pan Pacific saying it would cut cu output by 10% in Q1 ’09. In Peru Volcan halted work at a zn mine with capacity of around 150 ktpa citing low prices and labour problems. These supply cutbacks suggest miners see no near term end to falling demand however we are confident that longer term when demand recovers the supply chain could tighten very quickly, the super cycle will be in vogue again. Then around LME stock release the inflow of cu (Rott 5275 and Hamburg 1 k) and al (UK 5600, Asia 2600 and US 3825) took prices off the boil. The Dec German unemployment rate was 7.6% (Nov revised up to 7.6%). In the UK Dec new car registrations dropped 21% yoy with ’08 at 2.232 million units down 11.3%.  The Nov Euroland PPI collapsed 1.9% on the back of the drop in oil prices (Oct -0.8%) the annual rate declined to 3.3% (6.3%).

The US data today is employment data ahead of the Dec employment data Fri. The Dec Challenger report showed employers plan 166 kt job cuts down 8.4% (Nov rose 148%), annually job cuts rose 59% to 1.224 million job cuts. Then the ADP saw private employment jobs falling 693 k larger than expected (Nov -472 k). This added to the US$ weakness and picked the metals off the lows. From Chile the state cu commission Cochilco expects the cu price to average US$ 1.60 / lb (US$ 3527 / tonne) in ’09 and US$ 1.50 / lb (US$ 3306 / tonne) in ’10 with Chile producing 5.5 million tonnes and 5.8 million tonnes respectively in those years. On the world supply front they estimate surpluses of 215 kt and 600 kt in the two years. No price recovery built in by that producer. The DJI opened over 100 points lower, the US$ steadied and commodities resumed their retracement of the recent rally as growth worries rose in the ebb and flow of things.

Base metals continued to outperform in Asia with Shanghai cu up the 6% limit for the third consecutive session triggering a suspension of trading tomorrow. Index reweighting, strong equities, government and central bank actions and higher oil have combined to build investor interest in the sector despite poor economic data. The stronger US$ was ignored as its rise is seen as a side effect of the forthcoming Obama stimulation package. Dec US auto sales fell 36% yoy to an annual rate of 10.28 million units (Nov 10.13 mill units) in ’08 a total of 13.2 million units were sold. The individual figures show GM sales off 31%; Ford 32%; Chrysler 53%; Toyota 37%; BMW 36% and Honda 35%. See attached article from the FT Jan 06 edition by David Hale “There is only one alternative to the dollar” (www.ft.com).

The UK Nationwide Building Society reported Dec house prices fell 15.9% yoy (Nov -13.9%) as their consumer confidence index declined to 47 (51). The French Dec consumer confidence recovered to -44 (-43). The European Dec service sector PMI data was mixed with a lower bias Italy 40.3 (Nov 39.2), France 40.6 (46.2), German 46.6 (45.1), Euroland 42.1 (42.5), UK 40.2 (40.1) and Russia 36.4 (37.2). The Dec Euroland annual inflation rate was 1.6% (Nov 2.1%). In early trading cu dominated the volumes and price advance with pb in support as Doe Run indicated ’09 mine output would be reduced 1 million tonnes to 5 million tonnes, its smelting facilities produced up to 170 kt of pb in ‘08. Al dominated a routine LME stock announcement. The oil price continued to push higher hitting US$ 50 / bbl as the Russians flex their muscles over gas cutting supply to Europe in the dispute with the Ukraine. Despite EU protests they are so to speak “over a barrel” however a protracted dispute could detrimentally affect manufacturing. It is reported Freeport has agreed an ’09 cu TC / RC rate with a Japanese smelter in line with the rates sought by the smelters before Christmas, a 70% rise to US$ 75 / tonne and US$ 0.075 c/lb (’08 was 45 and 0.045).

Metals remained bid through the officials and into the US opening with no data till 15:00. The Dec non manufacturing PMI was 40.6 (Nov 37.3) showing improvements in employment, prices and new orders areas. The Nov NAR pending home sales index fell 4% as factory orders dropped a large 4.6% (Oct revised to -6% from -5.1%) with durable goods revised to -1.5% from -1%. Following the data the DJI having opened strongly over 100 points up gave back the gain, oil declined and metals peaked.

From the bell in ‘09 “stimulation” is the catch word; tax cuts, lower interest rates, government spending all will feature highly. The most anticipated event of all this will be Obama’s first moves after his inauguration on Jan 20, expect significant optimism to be built into the markets ahead of this. For all the government and central bank tweaking one thing will signal they have managed to start germination in the economy and that is a pick up in demand, watch for anecdotal evidence and data such as bank lending, consumer and business confidence, retail, housing and vehicle sales, container movements etc.

Asian markets rose in reaction to the Fri moves in Europe and the US with Shanghai cu up the 6% limit at one stage. In an attempt to boost trade flows the Chinese Ministry of Commerce will allow toll trading of cu, al and ni from Feb 1. This comes the day Chalco cut their spot alumina price by 23% bring he price down 50% since Jne ’08 and following the idling in Nov of 38% of their output (4.1 million tonnes). It is reported that Codelco has reduced its frame ’09 Chinese premium to US$ 72 / tonne from US$ 75 / tonne set in Nov. Highlighting the liquidity situation Pan Aust Ltd the second largest cu producer in Laos saw its share price jump 106% to A$ 0.175 per share after agreeing with its bank to roll over US$ 80 million in debt to Mch 2010. In Japan Dec vehicle sales fell 22.5% yoy (Nov -27.3%). The LME stock report was routine with material continuing to flow in. Prices were firmer in London then faded as the US$ made strong gains around 09:00 moving to € 1.367 from a € 1.392 open, metals remain supported by hopes of fund realignment interest.

Following the manufacturing PMI data Fri the Dec JPMorgan global manufacturing PMI was 33.2 (Nov 36.4). The Nov US construction spending fell 0.6% less than expected (encouragingly Oct was revised to -0.4% from -1.2%). The oil price pushed above US$ 48 / bbl as investors worried about Arab reaction to the Israeli action in Gaza. This seems overdone in the present economic environment were ME economies have been squeezed by the recent oil price and general activity tumble. The afternoon saw equities, US$ and commodities begin to configure again as 10 year US bond yields jumped higher on the prospect of increasing deficits under Obama.