Against the Grain

As we head into the end of Mch and Q1 the one dominating phase in many commentaries is “metals, financials, equities, currencies, fixed interest or commodities have registered largest quarterly moves in years” (quite a change around from Q4 ’08). In the case of cu it’s the largest rise since Q4 ‘87; yen fall since ’01; Shanghai Composite Index best start since ’00; finally the DJI is in line for its worst Q1 performance percentage wise since 1939 but the best Mch since 2000, so you get the drift as the world economy is set to post its slowest annual growth since 1945. Yet it seems to us the general market remains as someone said to us today “aggressively neutral”.

Attention turns to a swath of Mch economic data over the next few days with Japan kicking it off their manufacturing PMI improved to 33.8 (Feb 31.6) still in contraction with particular weakness in basic metal sector however average costs are declining sharply. The country’s Feb jobless rose to 4.4% (4.1%). In South Korea Feb factory output rose 6.8% month on month though a better way to look at it would be a fall of 10.3% yoy (Jan -25.5% yoy). In Europe the Mch UK GfK consumer confidence survey improved to -30 (Feb -35). The OECD predicts the world economy will shrink 2.75% and trade flows contract 13.2% this year.

The metals held overnight with a weaker US$ helping cu test 4000. The LME stocks were mundane with falls in al, cu and ni. The metals moved higher after stocks with them all tapping new daily highs cu to the fore 4045. Chilean Feb cu output was 383 kt down 9.8% yoy. The second ring close of pb was 1300 well above the Select trading range. In the DRC, Freeport and Lundin Mining reported the first cu cathode production from their Tenke Fungurume cu / co mine designed to reach capacity of 115 ktpa cu and 8 ktpa co by H2 ’09. The deposit was first explored in 1918. In Peru Glencore has halted production at its Iscaycruz pb (14 ktpa) / zn (175 ktpa) mine adding to its Rosaura mine so only Yauliyacu is operating a move fully expected by the market. The group accounts for 14% of Peruvian output. 

In the US the January Case – Shiller home price 10 city index was down 29% yoy (Dec -19.2%) and 2.5% mom; the 20 city index -19% yoy (-18.5%) and -2.8% mom continuing their record rate. The Mch Chicago manufacturing PMI eased to 31.4 (Jan 34.2) as prices paid and supplier deliveries eased but employment and new order sectors rose. The Mch Conference Board consumer confidence index rose slightly to 26.0 (Feb 25.3), the current reading slipped to 21.5 (22.3) and expectations improved to 28.9 (27.3), out of this jobs arose as the biggest worry. Metals struggled most of the afternoon as equities moved higher.

Comments over the weekend unsettled markets hitting equities. The car industry took centre stage over the weekend as the US Administration said plans submitted by GM and Chrysler were not viable and forced the GM CEO to resign and gave Chrysler 30 days to form a partnership with Italy’s Fiat (who would have thought the day would come when the US government forced a US car firm agree to be taken over by an Italian company) as conditions for further state aid. The dire state of the industry was reinforced by Feb Japanese automobile production data slumped 56.2% yoy while domestic demand slowed 24.3% yoy export output cratered 63.9% yoy.

In Europe, the Mch European Union business and consumer confidence survey declined to 64.6 (Feb 65.3).

A stronger US$ seemed to bash the metals around in Asian time as it touched € 1.320. The LME stocks saw rises in all except zn while on the cancelled warrant front cu 6600 mostly in Sing 4700 while the record US$ 300 premium of Shanghai al over LME is starting to see material cancelled in Asian and Japanese warehouses. As we reach the end of Q1 the highlight in the metals has been the Chinese state buying of base metals that has seen Chinese stock holders selling metal at a significant premium over the LME price into state entities. It appears to be a very expensive way to inject working capital into Chinese base metal companies however very welcome by the industry (cu and pb have risen over 40%; zn 20% and al 10%). On the metal equity front China’s largest company Aluminium Corporation of China (Chalco) forecast a Q1 loss and will cut capital spending by 34% over the year. It has reduced alumina output by 40% and al production 24% in the current environment. In Australia talk is growing that BHPBilliton will revisit a takeover of Rio Tinto.

The markets were unsettled by US Treasury Sec warning over the weekend that some banks still need large amounts of assistance with the DJI quickly down 200 points at the opening. At 14:30 the Mch Dallas Fed Texas manufacturing production index improved to -22.3 (Feb -36.1). As the equities fell gold jumped a sharp US$ 15 taking the base metals off their lows. Last twenty minutes as Obama spoke gold gave back the US$ 15 / ounce and base metals slipped in unison.

The G20 meeting in London next week has set itself a pretty tall order as it looks to; revive the world economy; restore lending; seek tougher rules for banks; reform the IMF and provide more help for developing countries – all in one day. In the past month an interesting trend has developed as the meeting has been organised almost every government policy has this caveat attached “this will be done as a public / private funded iniative”. It seems governments want to vilify the financial system and its employees in public to deflect attention away from their own failures then go down on bended knee to get them to pay for new policies as government coffers are empty.

The Asian session was marked by a US$ 130 / tonne range in cu as it quickly set a ’09 high then went into a tail spin on heavy Select volume the others metals seemed to stand back and watch in awe, as did equities and other markets. The weekly Shanghai stocks saw cu fall 6227 tonnes to 25,181; al down 27,920 tonnes at 141,965 and zn rose 4867 tonnes to 76,164. The Australian government said China’s Minmetals cannot proceed with its takeover of Oz Minerals in its present form as the latter’s Prominent Hill cu / gold mine which when at full capacity at the end of this year will produce up to 100 kt of cu contained and 70 k ounces of gold is in a military zone. The LME stocks highlight was a rise in al, over the week cu declined 3 k; al rose 19 kt; zn up 2.5 k; pb dipped 575 tonnes; ni jumped 4.5 kt and sn up 35 tonnes. On the warrants Mch 31 sees yearly rent due on material in warehouse and then from Apr1 increases in rents and FCA charges. A strengthening US$ sapped the metals with pb leading the way.

The first data of the day was from Japan, Feb retails sales fell 5.8% yoy. An interesting comparison of infrastructure costs in Guangdong China new subway construction costs US$ 100 million / mile (by the end of ’10 they will have build 154 miles in four years) in NY the 1.7 mile Seventh Avenue line will take 8 years and cost US$ 2.4 billion / mile. In Europe Q4 French GDP was revised to down 1.1% (Q3 +0.1%), yoy -0.9% and the UK off 1.6% (-0.7%) and yoy -2%. Despite revisions they sparked a sharp fall in the € and £stg.

In the US Feb personal income fell 0.2% (Jan +0.2%), spending rose +0.2% (+1.0%) as personal savings rose 4.2% (4.4%) the first back to back 4% rising in savings since Spt ’98. At 15:00 the Mch final Uni of Michigan consumer confidence index was 57.3 (56.3) the current reading 63.3 (65.5) and expectations 53.5 (50.5). Quite a few recent confidence numbers have garnered strength from expectations rather than the present. As so often the metals became the tail of the US equity dog.  

Over the week cu up 95, al off 46 rolls reversed with the next two zn up 89, pb down 65, ni off 300, sn rose 100, gold fell US$ 31 / oz, oil crept up US$ 0.8 / bbl, DJI rose 400 points at time of writing and US 10 year bonds yields up 0.1%.

Two drivers of the metal prices of late have been China and financial technical traders. Quite why the Chinese central and provisional governments are prepared to build metal stockpiles at local prices significantly higher than the prevailing LME price is a mystery to us, but perhaps that is the wonders of a centrally controlled capitalist economy. While we heard of macro funds buying commodities earlier this year when prices were lower recently the drive seems to have come from technical traders joining the trend. Any sign of economic recovery will be supportive of the metals and we believe the world reached its nadir in Q4 ’08 and is into a long hard slog move higher. Short term the outcome of the G20 heads of government meeting next week will be setter of sentiment.

On the economic front a few European confidence numbers Apr German GfK consumer sentiment survey was 2.4 (Mch 2.5), Mch French consumer confidence survey was unchanged at -43 while Mch Italian business confidence survey found little confidence as it hit a new all time low 59.8 (63.2). After two months of surprise increase UK Feb retail sales fell 1.9% significantly below expectations (Jan +3.6%) yoy +1.4%. The Irish economy contracted 7.5% in Q4 ’08 with construction down 24%, yoy it shrank 2.3%.

In the metals Doe Run’s Peruvian La Oroya smelter shut its cu line (54 ktpa) after announcing the zn / pb closure earlier this week. In Japan Mitsubishi Materials said output at its Onahama cu smelter (220 ktpa) would be reduced 30% for six months after a fire on Mch 12; its other two smelters would make up the output. The LME stocks dominated again by a jump in ni as it keeps pouring into Rott predominantly, other small changes either way with cu / zn cancelled warrants continuing to fall. The IAI reported western world unwrought al stood fell to 1.619 million tonnes (Jan 1.668 million tonnes and Feb ’08 1.545 million tonnes). Some M&A in the zn / pb arena Griffin Mining the operator of the Caijiaying mine in Hebei province China y/day bid for pb miner Ivernia the week it began shipping concentrate from its Magellan mine in Western Australia.

The US weekly jobless claims rose 8 k to 652 k. A second revision to Q4 GDP was -6.3% (-6.2%) with corporate profits down 28.4% (Q3 -3.2%). US equities continued to drive higher.

The markets took the Obama press conference in its stride, basically because he said nothing new. As the UK PM rallies support for the G20 meeting next week Jeffrey Garten made an interesting observation in this week’s Newsweek Magazine Mch 30 edition, “When I was a trade official in the Clinton Administration, I discovered that the British government was usually talented at writing summaries after difficult negotiations. Their communiqués were not just eloquent, but managed to brilliantly paper over major differences among the participants. It is a skill that will be vital on Apr 2 when heads of state of the G20 meet in London to coordinate policies for the worldwide economies crisis”. From the same magazine see Goldman Sachs view on BRIC “The New Shopping Superpower” (www.newsweek.com). At the EU Parliament today the Czech PM (y/day deposed in a confidence vote) whose country holds the EU presidency for the six months till June argued the Obama stimulus and bailout package “will undermine the stability of the global financial market”. The comments show the problems of consensus over what to do going forward. He hosts Obama in Prague at the EU / US Summit after the G20 meeting which he is attending.

Little action overnight, the weekly ABC / Washington Post consumer confidence index was -49 from previous -47. Then the economic data got worse Japan the trading giant saw Feb exports collapse 49.4% with the decline across all sectors (auto’s -70.9%) and regions (US -58.4%; Europe 54.7%; Asia 46.3% and China 39.7%). This compared to its neighbours Taiwan -28.6% (Jan -44.1%) and South Korea -17.1%. We need to see these cogs begin to turn again if world growth is to recover. Things not much better in Europe, Mch Italian consumer confidence survey declined to 99.8 (Feb 104.0) and the Mch German Ifo business climate index fell to 82.1 (82.6), current environment 82.7 (84.3) and expectations up to 81.6 (80.9). The UK CBI distributive trade survey showed Mch retail sales volume at -44 (Feb -25). In the UK a Treasury auction of £ 1.75 billion 40 year 4.25% gilts (bonds) failed being undersubscribed at £ 1.63 billion sending yields higher and £stg lower.

The metals continued to see profit taking after the recent rush up as the US$ strengthened and poor economic data. The LME stocks were mixed with a further strong rise in ni with some pb in while the others registered falls. Interestingly cu and zn cancelled warrants continue to decline. In al it remains a case of quoting a line from the Ancient Mariner poem – “al, al everywhere but not an ingot to spare”, despite the millions of tonnes in warehouse most is locked up in deals. Platts reports China’s Henan province will buy 500 kt of al for its reserve to help local smelters, we can understand such a move if prices were rock bottom but why after a US$ 200 rally and significant fall in smelter input costs – that is controlled capitalism for you. Despite the run of mine closures Zambia reported cu production for Jan / Feb rising 36% yoy to 133 kt. In Chile the national mining association SONAMI expects the nation’s ’09 cu production will be 5.4 million tonnes (’08 5.33 million tonnes).

The US weekly MBA mortgage survey continued improvement in purchase and refinance mortgages with the latter to the fore. Durable goods orders for Feb rose 3.4% completely against the run of play as expectations were for -2% (Jan revised significantly down to -7.3% from -4.5%), ex transportation orders rose 3.9%. The DJI quickly recovered y/days loss rising 150 points and turning the metals around. In another surprise Feb new home sales jumped 4.7% an annual rate of 337 k units against anticipation of -2.3% (Jan revised to 322 k units -13.2% from -10.2%). The US equity direction drove metals for the remainder of the afternoon.

Contrast the London economic conference in 1933 that attempted to dig the world out of what became known as the Great Depression lasted over a month while the Apr 2 London G20 jamboree has set a day to find and agree solutions to the present array of problems. The day must find time to incorporate such important things as photo opportunities, a working lunch and press gatherings. On the same trip eight day trip President Obama has a NATO council meeting (lasting longer than the G20 summit), many bilateral meetings with other leaders, an EU / US summit and visit to Turkey. Forgive us for thinking that in this world of “instant gratification” the leaders cannot even spare the time to deal with the pressing issue of the moment. That is why we have such little expectation of any substantial come from the event and suspect most leaders’ first action after it ends will be to check their popularity ratings. Look at the past record at the Washington Nov ‘08 G20 meeting leaders committed to protect free trade since then the World Bank says 17 members of the group have adopted 47 measures aimed at restricting trade.

Wow the Dow up 7% on the latest US bank rescue plan highlighting the stack of money waiting to jump in when investors think the time is right. Metals were stronger in Asia led by cu up to 4134 (y/day high 4135) then things quickly came back. Asian equities were up (Nikkei by 3.3%) having stolen a march y/day. By the time London opened the metals were under pressure and the FTSE quickly turned red as US equity futures dipped. South Korea announced a US$ 13 billion economic stimulus package. >From Europe Feb French household consumption on manufactured goods fell 2% (Jan +1.7%), the flash Mch Euroland composite PMI rose to 37.6 (Feb final 36.2), manufacturing 34.0 (33.5) and services 41.1 (39.0). Then the Feb UK CPI surprisingly rose 0.9% as lower £stg impacted yoy +3.2% and RPI was up 0.6% yoy 0%. Metal prices drifted throughout the morning on lower equity prices.

The LME stocks saw cu and al fall with ni jumping 1116 tonnes as it flowed into Rott. The Shanghai Futures Exchange will start trading steel contracts on Mch 27 and is looking at a pb contract. Freight rates look set for a tough year as the WTO expects trade to fall 9% we see this as an important guide to genuine economic recovery.

The US equities were lower on the opening then recovered steadying the metals. More improvement in the US as the Mch Richmond Fed manufacturing index improved to -20 (Feb -51), shipment index -15 (-56), services index unchanged at -28 and retail revenue-26 (-32). That was the end of the data and all eyes turned to the equities. The DJI hovered around 70 points down which steadied metals nerves and metals recovered as again traders will square off ahead of Asian trading. If we do not see concerted cu buying from Asia after this US$ 200 pullback sellers could get bolder. This evening Obama holds a national evening prime time press conference that kept US equities bid. 

Metals continued to firm in Asia as markets begin to suspect the “cogs of commerce” are starting to turn again as China picks up. Data in China showed Feb implied cu demand jumped 44% (591 kt) over Jan and 38% for the first two months of the year and al demand 10% (the operative word is “implied”). There are considerable funds in cash waiting for a sign to get back into other asset classes. Asia saw equities move higher after the US equities retreated Fri with the Nikkei up 3.4%. Metals move higher in heavy Select volume with cu touching 4135 and zn limit up in Shanghai. From Japan Q1 a manufacturers’ confidence index was -66 (Q4’08 -44.5).

The LME stocks saw the big three (cu into Korea and US, al Europe, zn US & Europe) rise few thousand tonnes and the others fall. On Fri Doe Run halted work at its Peruvian La Oroya zn / pb smelter after banks cut credit lines meaning they could not purchase concentrate feed (the final US owners have Madoff issues).In Western Australia Ivernia’s Magellan pb mine will export its first concentrate in two years after environmental problems.

The US early Mon unveiled plans to establish a programme, the Legacy Loan Programme (LLP a catchy investment acronym) with private capital to re launch the Treasury bank bailout plan which boosted Asian equities. However to large sticking points seem unresolved first is the central question of how to bridge the divide between what the banks want to sell the assets for and what potential investors are willing to pay. The other issue is possible participants want full and clear government guarantees that there would be no compensation limits or other impediments. See WSJ article by the Treasury Secretary (www.europe.wsj.com).

The Feb Chicago Fed National activity index improved to -2.83 (Jan -3.74) with improvements in employment production and consumption and housing. US equities showed good gains with the DJI up over 200 points, however a stronger US$ saw metals fade. At 14:00 the Feb existing home sales rose 5.1% to an annual rate of 4.72 million units with foreclosures and short sales 45% of the total (Jan 4.49 million units). The housing surprise kept the equities adding to their gains (DJI +4%) however metals struggled with a blip at the end as no one wants to be short overnight.

The US equities could not carry forward the rally triggered Wed by the Fed move leading to a quiet Asian session with Japan on holiday. The EU at a two day leaders’ summit said they may double an emergency fund to help member states to € 50 billion and tentatively boost IMF funds but declined to increase stimulus packages as the US requested preferring to gauge the effect of existing actions. Y/day we commented that the stick of government economic stimulus is protectionism at the EU summit today it was revealed the French car manufacturer Renault was moving production from Slovenia to create jobs in France only weeks after the EU agreed France could give state aid to carmakers. In Germany Feb PPI fell 0.5% (Jan -1.2%) which saw the yoy rise 0.9% (+2.0%). The Jan Euroland industrial production dropped 3.5% (Dec -2.6%) less than feared as yoy was -17.3% (-15.5%). In a sign that trade remains subdued the Baltic Dry Freight index is off 33% so far in Mch after a strong rally at the start of the year. Any significant recovery in trade will be a significant swallow in signalling the return of economic growth.

Metals bolted out of the stable in London this morning with cu up to 4075, al looked at 1500 and zn above 1300. Overnight a cargo ship carrying metal from the Black Sea to Korea was seized by pirates off the coast of Somalia. The weekly Shanghai stocks saw cu fall 3327 tonnes to 31,408; al off 7057 tonnes to 169,895 and zn rose 5436 tonnes to 71,297. The LME stocks were dominated by a 10 kt rise in cu mostly into Europe. On the week cu stocks rose 6 kt; al up 88 kt; zn down 800 tonnes; pb increased 1150 tonnes; ni up 1860 tonnes and sn jumped 12% or 1160 tonnes. The ICSG estimates that the global cu market finished ’08 in a 360 kt surplus as the market turned from a 140 kt 1H deficit into a 500 kt 2H surplus (’07 surplus was 290 kt).

No US data so expect the metals to equity gaze the afternoon away. Mexico cut official interest rates 0.75% to 6.75% after the US trade dependant country saw industrial output fall 11.1% yoy in Jan. Despite the relative calm of the equities the metals were particularly nervous as traders positioned themselves for the close.  

On the week cu jumped 301, al rose 116, zn increased 40, pb up 96, ni rose 400, sn dropped 410, gold climbed US$ 35 / oz, oil rose US$ 4.7 / bbl, the DJI put on 230 points at time of writing, US 10 year bond yields fell 0.21% and the US$ weakened significantly by around 5% against the €.

As governments rush to shore up their economies there are two instruments they use, “the carrot is fiscal stimulus, interest rates and subsidies”. Take China part of the stimulus package was a cut in vehicle sales tax, this has resulted in GM’s van venture seeing sales rise 32% in Jan / Feb with further subsidies to boost van sales in rural areas. As an analyst was quoted “every farmer in China wants a new vehicle all 800 million of them”. The “stick is protectionism”, much of it subtle and low level such as Buy American, changes to immigration criteria, tighter border restrictions such as those threatening NAFTA relations with the US and Mexico, investment guidelines or restrictions on trade (Canada recently took action after finding the Chinese were dumping al extrusions on them). While countries queue up at major conferences to denounce protectionism they are all searching for ways to tip the playing field in their favour. See article from the FT Mch 19 edition “Lessons for the West from Asian capitalism” (www.ft.com).

The Fed FOMC press release acknowledged the economy continuing to contract, with the interest rates they control near zero and a subdued short term inflation outlook they moved to option 2, increase their balance sheet (print money) and buy securities. This action saw US 10 year bond yields fall 0.5%, the US$ weaken, gold rally US$40 / oz and equities move higher. The base metals rallied in vary degrees with cu to the fore. With the recent general improvement in investor mood reflected in the equities rally the aggressive nature of the Fed’s cash injection caught markets by surprise and might cause some profit taking. Another danger is hedge funds or foreign countries and not banks take up the Fed offer to buy back securities creating a zero sum game.  

In the metals China’s central province of Shaanxi said it was buying 77 kt of pb / zn from four local smelters as ad hoc reserves. The LME stocks were a mixed bunch without any real features. There seems to very little news about on the fundamental side recently. Cu moved briskly higher breaching 4000 with al as its co pilot while pb / zn activity was more muted in what looked like unwinding of long pb / short zn spreads.

The Mch UK CBI industrial trends survey showed the total order book balance was -48 (Feb -44) better than expected. The US weekly jobless claims fell 12 k to 646 k. A rush of data at 14:00 the Mch Philadelphia Fed manufacturing index improved to -35 (Feb -41.3). While the Feb Conference Board leading economic indicators declined 0.4% to 98.5 (Jan +0.1%), coincident index off 0.4% at 102.5 (-0.6%) and lagging index off 0.4 to 113.5 (-0.1%). As the afternoon wore on the US equities gave up ground taking the shine off the metals.

Despite an about turn by the US equities settling the DJI near unchanged Asian equities continued a broad move higher on the back of a general mood improvement with the Nikkei and ASX up 3%. The base metals held well as technical traders continue to be squeezed out of positions. Feb Japanese machine tool orders were revised to gaining 7.2% however the yoy data is hideous falling 84.4%. Some old data from there Jan Tertiary Index rose 0.4% to 106.4 (Dec -1.6%), the first rise in three months was quickly discounted because economists saw it occurring in sectors that aren’t typically affected by economic swings such as information and communications. Singapore continues to disappoint as Feb non oil domestic exports fell 23.7% yoy (Jan -34.9%), electronics -31.9% and pharmaceuticals -23.4% yoy. Chinese Feb foreign direct investment declined 15.8% (Jan -32.7).

In the metals an analyst y/day predicted the Chinese SRB would build its stockpile by a further 900 kt this year on top of the 300 kt already secured, if correct this should soak up the majority of any global surplus. We wonder if as Chinese companies scan the world for resource acquisitions whether the stockpiling action is not part of the overall policy. While commodities prices have make prospective targets attractive they do not want prices to fall too much lower. LME stocks rose across the board with the exception of pb, most markedly in zn, ni and sn. Cancelled warrant levels in cu and zn continue to fall. The Q2 Japanese al term premium was agreed at US$ 57 / 58 over LME (Q1 57 / 63) with low domestic demand stockpile surges are being avoided by sales to China.

The Mch German ZEW investor confidence index rose to -3.5 (Feb -5.8) to its highest level in two years, current conditions -89.4 (-86.2) and expectations -3.5 (-5.8). The US Feb housing starts rose 22.2% to 583 k units (Jan revised higher to -14.5% 477 k) and building permits rose 3% at 547 k units (Jan revised better -2.9% at 531 k). It is interesting that more positive data on all fronts usually has the following caveat attached by the newswires “unexpectedly”. On the prices front Feb PPI rose 0.1% (Jan +0.8%) with core PPI +0.2% (+0.4%) raw material prices falling 4.5% (-2.9%). In the afternoon US equities seemed range bound and base metals looked tired.