Against the Grain

Europe opened to a massive bank loss in the UK (RBS reported a £stg 24 billion loss and more government / taxpayer support) and a better Mch German GfK consumer climate index of 2.6 (Feb 2.3) as the Feb unemployment rate rose to 7.9% (7.8%). The LME stocks saw cu fall and its cancelled warrants rise; the other all rose with zn up 9075 with Detroit getting 6900 and Johore 2700 offset by 5425 tonnes of cancelled warrants. This is a trend we expect to gather pace as material is locked away in poor markets like the US and taken out of areas with better prospects in Asia. A survey of general business in Euroland showed a continuing deterioration, the Feb business climate was -3.51 (Jan -3.03), consumer confidence -33 (-31), industrial confidence -36 (-34) service confidence -23 (-22) and economic sentiment 65.4 (68.9).  It seems the price direction of the metals is becoming increasingly tied to the performance of equities.

In the metals, Newmont Mining expects its Indonesian Batu Hijau cu / gold mine will in ‘09 produce 60% more cu concentrates (206 kt) as it moves into higher grades. The reduced price volatility on the LME has seen the ICH lower initial margins from Mch 4. The IAI reported Jan global unwrought al stocks at 1.666 million tonnes (Dec 1.676 and Jan ’08 1.640 million tonnes). It is reported from the AZA conference that the zn TC benchmark for ’09 has been set at US$ 194 / tonne based on an LME cash price of US$ 1250 / tonne (’08 TC was around US$ 350 / tonne).

The US weekly jobless claims rose 36 k to 677 k. At the same time Jan durable goods orders fell 5.2% (Dec revised to 04.6% from -3%), ex transportation down 2.5% (Dec -3.6%). Then at 15:00 Jan new home sales sank 10.2% at 309 k units (Dec was revised up to 344 k units from 331 k). The afternoon saw stronger equities, climbing oil US$ 45 / bbl and falling gold US$ 337 / oz as base metals remained firm led by cu at 3535 mid afternoon. Then Feb Kansas City Feb manufacturing index inched up to -24 (Jan -25). After the LME pm rings the US equities turned lower capping further metal rises. The focus in the US was on the first Obama budget and rising GM losses.

The general state of economic negativity really hits you listening to BBC radio; y/day second news story on the early bulletins was the DJI had fallen 3.4% to a 12 year low. After the Bernanke / Obama shows the DJI rallied 3.3% but this was unreported emphasis was on Jan Japanese export data that collapsed 45.7% yoy (Dec -35% yoy) and imports declined 31.5% taking the trade deficit to a record US$ 9.9 billion. The US market got support from Bernanke playing down bank nationalisation and Obama State of the Union address the re emphasised HOPE. Rest assured the press will not become positive till well after the recovery begins – good news is not news.

The weekly US ABC / Washington Post consumer confidence index was -48 (-49). The mood in metals has turned 180 degree since this time y/day when sellers probed the lows, now they are testing near term resistance with cu above the 10 dma at 3320. The LME stocks saw a rise in free stock of all the metals led by al however more interesting was a further rise in cu (12,100 Gwangyang 7400 and Rott 4300 cancelled now 6% of total) and zn warrants (cancelled to 7% Sing 2875 tonnes). The German final Q4 GDP was -2.1% unchanged from the previous estimate as yoy GDP was -1.7%. In Euroland as a whole the Jan EuroCOIN indicator of economic activity declined to -0.63% (Dec -0.21%). The UK Q4 GDP was revised to -1.9% the largest drop since Q2 ’91. The supra national European Bank of Reconstruction and Development (EBRD) established in ’91 suffered its first loss since the Russian Crisis of ’98 as its investments declined in Eastern Europe.

On the metals front it is an encouraging mix of buying and production cuts. The Chinese SRB purchased 100 k tonnes of zn (at US$ 1680) to add to the 59 kt it bought in Feb (which was at a higher price but smelters held back) and is expected to take another 100 kt in Mch / Apr. The buffer stock is reported to be close to buying 300 kt of al with another 400 kt by Jne. In Australia, Kagara has stopped processing ore at its Queensland cu / zn mines for five days after the tropical storms that swept the area. Supporting the recent cu warrant buying in Asia, which we believe has been in excess of 50 kt it is reported Japanese cu cathode shipments for Mch are sold out as local and Chinese demand picks up.

The metals confirmed their slavish fascination to the DJI quickly giving up ground as it opened down 50 points. The Jan existing home sales fell 5.3% to 4.49 million units more than expected meaning inventories are at 9.6 months supply (Dec +4.4% at 4.74 million units). The DJI did not seem to like the Obama speech or this number and was soon down over 150 points. It appears investors bought equities ahead of the Obama address and after Bernanke’s reassurances but saw nothing in the speech of substance. Like seeing a very nice car at the Detroit Motor Show however closer inspection shows nothing under the bonnet. Despite weaker equities the base metals had constructive closes near the top end of the range.

What a difference a year makes from the AtG Feb 22 ’07 - The commodity stampede continued its momentum Thurs (which strong gains in the base metals) despite poor US economic data, the Feb Philadelphia Fed index came in at -24, below an expected recovery to -10 (Jan -20) and the Jan Conference Board index of leading economic indicators fell by 0.1% (Dec -0.1%). On top of this the Federal Reserve reduced its growth forecast for the US, the EU did similar for Euroland and the OECD chief said world growth would be lower than his organisation had predicted in Dec. Note how the economy was already slowing back then but investors ignored it, at the time cu was 8830, al 2232, zn 2530 and pb 3335. Are we beginning to see the reverse effect now with investors throwing in the towel as signs of growth appear in China and Asia although admittedly the West could do better.

Overnight equities slumped again as investor fled the US financials seeing the DJI off 3.4% to a 12 year low on fears the banks, insurance and car makers will need more taxpayer cash. Despite the fall in equities gold could not breach US$ 1000 / oz. In Asia reports are the Chinese SRB will meet zn smelters Wed to discuss new purchases (100 kt mentioned) as a further 5 kt of warrants were bought in Johore. There seem to have a nice little arbitrage going sell Chinese material at a premium to the LME to the government and buy in LME priced material. The LME stocks saw inflows in the case of zn withdrawals and cancellations in Asia are being offset by deliveries into New Orleans which we believe is Asian material. In Europe French Feb consumer confidence index was -43 (Jan -42) while Italy’s improved to 104.1 (102.6) and the German Ifo business climate index was 84.3 (Jan 86.8), current sentiment index 82.6 (83.0) and expectations 80.9 (79.4). See Newsweek article edition Mch 2 by Fareed Zakaria “To Pack a Real Punch” quoting 97% of lead acid batteries are recycled (www.newsweek.com).

The US data remains grim the Dec Case Shiller 20 city home price index declined 18.8% yoy (Nov 18.2%) there is a large disparity between Denver -4% and Phoenix -34%. Then the Feb Richmond Fed manufacturing index was reported at -51 (Jan -49) and the shipment index at -56 (-54). Finally, the Feb Conference Board consumer confidence index was 25.0 a record low (Jan 37.7), the present situation deteriorated to 21.2 (29.7) and expectations 27.5 (29.7). Fed Chairman Bernanke appeared before the Senate Banking Committee to present his twice yearly report pushing a well trodden path committing all available resources to the problem while warning things could get worse. After that everything then focused on the equity arena, initially DJI rushed up 90 points then dipped back to unchanged the roared back over 120 points higher in just over an hour. Cu led the metals higher testing 3300 while gold fell sharply back testing 960 late while the Japanese yen has weakened against the US$, a encouraging sign for economic recovery.

It appears the Chinese State Reserve Bureau has become little more than a market support mechanism we got the following comment from the natural rubber market that the SRB had bought rubber from Chinese producers as prices above the world spot price and like al on Fri the action had trigger a sell off. The feeling being the market must be bad shape if the government has to pay over the world price to subsidies Chinese producers. A once revered secret state reserve system has become a political last resort buffer stock manager.

The metals in Asian time got a boost, one gets the feeling more because there was no big government meeting that offered dull platitudes and there wasn’t a bank failure or any other such news. A mixed batch of LME stock data al and ni continued to pour in while cu had a small decline and zn registered a good fall in Asian stock (Sing 2715 & Johore 1875) and Sing cancelled warrants rose 4300. Every so often a really good article appears and if you have time read the attached “Why the experts missed the crash” an interview with Philip Tetlock in money magazine.

Very little data around in the US the Chicago Fed National Activity Index improved to -3.45 after Dec was revised lower to -3.65 from -3.26. The three month moving average data was -3.41 from -2.70. After 14:30 everything followed the DJI from new highs on the trail lower. The Feb Dallas business activity index dropped to -57.3 (Jan -50.5) the worst reading since ’75 with the manufacturing production index was -36.1 (-15.4). The recent manufacturing numbers from the US and Europe has been poor and suggests activity remains weak. Gold had volatile afternoon selling off from 987 to 775 as the DJI opened up the recovering to 995 as the DJI hit 100 down. The ongoing buzz conversation amongst the talking heads is should US banks be nationalised, specifically Citi and BoA.

Very little news about overnight as markets consolidated recent moves. London metals opened on a brighter note with cu leading the way. It looks like the Australian Senate will hold an inquiry into the recent spate of Chinese bids for the country’s natural resources. While in Chile the government welcomed the prospect of Chinalco acquiring 15% (half of Rio Tinto’s share) in the Escondida cu mine. It is clear the Chinese are using this downturn to secure a share of raw material assets in preparation for the next upturn emulating a policy the Japanese established in the ‘60’s and India and other emerging nations have begun. It remains to be seen how comfortable resource rich nations are “selling the farm”.

From Russia Jan retail sales rose 2.4% yoy (Dec 4.8% yoy) with unemployment rising to 1.8% the highest since Mch ’05. The LME stocks again dominated by al (global inflow Rott 13 k, Sweden 5 k, Asia 6 k and Korea 2.5k with small US) with increases also in cu, zn (Johore 1225 & NO 1700) and ni (Rott 816). Cancelled zn warrants in Johore were 4175 tonnes rising to 6% of total stock and we expect this to keep rising. As a comparison, the global breakdown of zn in warehouse is Europe 13%; Mid East 7.5%; Far East 52.5% and US 27% compared to pb where is Europe 50%; US 49.8% and Far East 0.2%, is there a move to sweep zn out of Asian warehouses. On the cu front we hear warrant purchases continue apace which coincides with the Chinese SRB desire to replenish its stockpile.

The US weekly jobless claims were steady at last week’s revised 627 k as Jan PPI was recorded rising 0.8% (Dec -1.9%) as ex food and energy was up 0.4% (+0.2%). At 15:00 the Feb Philadelphia Fed manufacturing business activity index was reported at -41.3 significantly below expectations (Jan -24.3). The Conference Board leading economic indicators rose 0.4% to 99.5 with a comment that the level of intensity of the downturn should ease. The coincident index fell 0.5% to 103.3 while the lagging index declined -0.1% to 113.9. In a low volume session two things stood out those metals that saw the biggest LME stock rises perform best price wise while cu led the price direction and in the afternoon it keyed off US equities.

The US came back y/day after a long weekend and the markets had another bout of “throwing in the towel” led by equities as the DJI conceded almost 4%. We believe the catalyst for this was the weekend’s G7 finance ministers meeting in Rome best summed up by the hapless Japanese finance minister. The event reinforced the perception that governments do not have a co ordinated plan as to how to reinvigorate their economies and comes after the poor performance of the new US Treasury Secretary last week at his bank bailout press conference. It is clear that governments have got to take stock and appear with a comprehensive plan rather than trying to grab sound bites. Against this businesses that overstretched themselves in the good times and capitalised their profits are now seeking to socialise the resultant losses. See attached FT article Feb 18 edition by Martin Wolf, “Japan’s lessons for a world of balance sheet deflation” (www.ft.com).

In the US overnight the Feb NAHB housing market index improved to 9 from the record low (Jan and weekly ABC / Washington Post consumer sentiment index improved to -49 (-53). In Asia, Taiwan Q4 GDP fell 8.36% yoy (Q3 -1.05%). The metals were steady in Asia selling off as London opened. The LME stocks highlighted by a 139 kt rise in al stocks (US 98 kt, Sing 15 kt, Korea 11 kt & Europe 10 kt) taking total stocks over 3 million tonnes. On the other had cu (Busan 1500) and zn (Sing 3225 cancelled warrants fell) stocks declined reflecting the recent warrant buying in Asia. This stock moves lifted prices including al off their lows. Having bought cu, al and zn in Jan there are indications that China’s SRB is getting ready to do the same in Feb. It is generally accepted that in Jan they acquired 59 kt of zn, 290 kt of al and upwards of 200 kt of cu with an overall of target of between 300 kt (in the case of zn) / 600 kt (cu /al) by the end of Q1. While attention has been on the bushfires, torrential rain in the north of Australia is likely to disrupt mineral exports in the near term. The UK Feb CBI industrial trends survey was -44 (Jan -43) stuck at a 28 year low.

In the US today we got the sensitive Jan housing starts that came in at 466 k units or -16.8% (Dec 560 k units / -14.5%) and building permits at 521 k units down 4.8% (547 k units / -11.1%), not encouraging. The metals recovered after housing figures as European equities took back loses. This was followed up by Jan industrial production off 1.8% (-2.4%) and capacity utilisation 72.0% (73.3%). Around 14:30 the metals rally peaked out and sellers got on top again before stronger US equities turned the play again.

The markets seem to be caught in the eye of a storm at the moment waiting to see which direction they are flung out we would suggest a 70% chance it will be lower as the dithering of authorities destroys confidence and 30% higher as after try all the wrong options we strike it lucky. Tonight Obama unveils his administrations US$ 75 billion foreclosure relief plan let’s see if they do better. There is a danger that the more money governments throw at this problem the jittery the markets get.

Overnight gold moved sharply higher on worries that some EU countries could see their sovereign debt down graded as the recession gathers pace most at risk are Ireland, Spain and Greece, this impacted onto the €. In the metals zn gained ground on talk the SRB is again about to step into the markets and bid for metal to relieve the pressure on smelters (this was quickly discounted once London came on line) while cu posted good volumes on Select with over 2,000 lots trading in a US$ 95 range.

Metals were under slight pressure a general concern over future economic growth kept the sellers on top. Chinese Customs said Jan cu imports rose 27.7% to 202 kt while scrap declined 56.2% at 180 kt. The LME stock were again dominated by inflows to al, zn (cancelled warrants in Sing 2450 and Johore 525 saw the total reach over 5% of free warrants), cu and ni. On the economic front Jan Singapore non oil domestic exports fell 34.8% yoy (Dec -20.8%) with electronics down 38.4% yoy and pharmaceuticals falling 4.5%. Further Jan Singapore port container volume dropped 19.6% to 1.97 million twenty tonne units (TEU). In Europe Jan UK CPI fell 0.7% rising 3% yoy, core CPI was down 0.8% however up 1.3% yoy and the RPI declined 1.3% to advance 0.1% yoy – on the whole less than expected as the weak £ kept import prices high. In Feb the German ZEW investor expectations sentiment survey improved to -5.8 (Jan -31).

The US NY Fed Empire State manufacturing survey was poor -34.65 (Jan -22.2) with new orders and employment suffering. The Chilean state research group Cochilco said the country produced 5.33 million tonnes of cu in ’08 down 4.1% from ’07. At 14:30 with the President creating greenhouse gases on his way to sign the stimulus package in Denver the DJI plummeted 300 points as gold bolted to US$ 970 / oz. The markets were spooked by falls in Asia and Europe and worries over GM and Chrysler bailout strategies. Against all the bad sentiment the base metals tried hard to hang on in.

Correction – y/day we said Minmetals bid for Noranda in the 90’s in fact they proposed a friendly takeover in Spt ’04, how time flies we have had boom and bust since then!

More evidence of the speed and brutality of the economic downturn appeared today with Japan reporting Q4 ’08 GDP falling at 3.3% (Q3 -0.6%) generating a horrific 12.7% yoy drop (-2.3%), this is the worst slump in 35 years when exports disintegrated during the first oil crisis. This time the damage has been compounded by a strong yen that has stifled any chance the export sector had. Anecdotal evidence over the weekend seemed to confirm our growing view of strengthening Chinese domestic demand as exports business remains hard pressed. The Jan Chinese foreign direct investment data saw it decline 32.6% yoy to US$ 7.54 billion (Dec -5.7% yoy). Chinese benchmark spot coal prices fell to a two month low as port stocks riose and Jan power generation fell 13% yoy.

Interestingly the G7 finance ministers meeting this weekend passed almost unnoticed, highlighting their impotency in the present circumstances. The base metals eased overnight led by cu after the Japanese data. The LME stocks dominated by rises in most metals however following on from our comments Fri about Asia cu and zn warrant buying, cancelled cu warrants rose over 4 k (mostly Busan) and zn 5 k (Sing & Johore). In Australia another mining company looks set to fall into Chinese hands as Minmetals bid for the distressed OZ Minerals cu and zn group, the deal needs shareholder and government approval (this follows the minnow Perilya and the giant Rio Tinto). In these times of trouble for miners, China is using its cash to secure raw material supply. (Back in the 90’s Minmetals bid for Noranda however its cautious due diligence process ran for so long the recovery in metals prices ended the deal). Meanwhile Norilsk suspended operations at Black Swan and Lake Johnston ni mines in Western Australia. Kazakhstan reported Jan refined cu output rose 2.5% yoy to 30 kt, zn 1% to 31 kt and alumina +3.6% at 146 kt. The Jan Russian industrial production fell 19.9% (Dec +3.8%) and yoy fell 16%, the biggest falls occurred in steel, cement and automobiles.

The ILZSG reported zn in a 195 kt surplus in ’08 (47 kt surplus ’07) with pb showing a 19 kt surplus (67 kt deficit ’07). In Peru, Dec economic growth was 4.9% bringing ’08 growth to 9.84% (9% ’07). The US and Canada are out on holiday resulting in low volumes on the day.

For those looking for the “green shoots of recovery” (like us) Asia is the focus of attention, with China to the fore. In the past month there have been quite a few articles in the business press along the same theme. The Asia crisis of the ’97 came to a head because of the region’s dependence on foreign investment. The countries learnt from that lesson recovering by building a strong export sector that produced large budget / trade surpluses. These were recycled into the countries buying these exports. However the reliance on the G7 as customers has again seen them come to grief. Fortunately most have the national balance sheets to launch strong stimulus plans as seen in China and Singapore. The entrepreneurial drive of the region remains in tact and commentators believe recovery needs to be built on a change tack away from exports towards strong domestic consumption. What appears clear is having gone into the downturn last the emerging market sector has the youth and flexibility to come out first.

The metals again quiet in Asia with support coming from the US equities continued recovery after the London close. In Australia a revised stimulus package was passed by the Senate as expected which should see the equivalent of a 1.3% boost to GDP in ’09. The weekly Shanghai stocks all rose cu 5328 tonnes to 33,861; al 2099 tonnes to 201,082 and zn 599 tonnes at 63,640. London opening was rather quiet. The LME stocks daily movements were dull while on the week cu rose 15 kt, al up 59 kt, zn increased 225 tonnes; pb rose 925 tonnes, ni jumped 4 kt and sn fell 270 tonnes. This week we have hear of good buying of Far East cu and zn warrants both of which could have topped 7 kt so it will be interesting to watch cancelled warrant data in that region to see if the material begin to move. At present cancelled warrants represent 1.2% of total cu stocks and 2.9% of zn. The news was not good from Europe  Q4 German GDP fell 2.1% (Q3 -0.5%) the lowest since Q1’87 as yoy growth was down 1.7% (+0.8%), preliminary  Italian Q4 GDP was -1.8% and yoy off -2.66%. In Jan European new passenger car registrations slumped 27% to 958 k the lowest in 20 years. Admittedly in low turnover however most of this week has seen metals prices fall in the premarket steady then move higher in the ring session before sliding back after 14:00, perhaps signalling there is trade buying around.

The US director of national intelligence told Congress that the global economic turmoil and the instability it could ignite had outpaced terrorism as the most urgent threat facing America. The preliminary Feb Uni of Michigan consumer confidence survey disappointed back to 56.2 (Jan final 61.2), while the current index improved to 67.1 (66.5) expectations slumped to 49.1 (57.8).  The metals followed the equities in the afternoon.

The US celebrates President’s Day on Mon looks like everything closed.

Over the week cu fell 110, al off 90, zn down 47, pb drifted 20, ni dropped 1300, sn up 150, gold rose US$ 23 / oz, oil down US$ 4 / bbl, DJI declined 380 points and US 10 year bond yields off 0.14%.