Against the Grain

Equities continue to move higher helped by encouraging bank trading updates, the DJI adding 2.5% and NASDAQ up 4%. Since last Spt we have argued that the full fury of the economic slowdown has been felt on Wall Street rather than Main Street and it is interesting to see the US weekly ABC / Washington Post consumer sentiment index improve to -47 (-48) with a significant fall in those pessimistic about the economy. The shattering economic data of Q4 ’08 was a direct consequence of a meltdown in the financial core of economies. In the UK Jan unemployment rose to 6.5% (Dec 6.3%) the highest level since ’97 as a report points out the job losses have centred on the private sector with the public sector almost “immune”.

Metals continued to edge higher in Asian time though are beginning to show signs of altitude sickness as volume subside and technical buyers seem satisfied. The LME stocks dominated by another deluge of al (US 49 k; Europe 9 k and Sing 7.5k) with all the others registering increases except zn. Worth noting is the recent surge in ni and sn stocks. The World Bank has reduced its forecast for Chinese growth this year to 6.5% (7.5%) below the official government target of 8%.

The US weekly MBA mortgage survey show an improving trend in both new purchases and refinancing. At 12:30 the US Feb CPI rose 0.4% (Jan +0.3%) and core CPI increased 0.2% (+0.2%), as anticipated, core annual CPI is running at 1.8%. With the US data coming out early as a result of the summer time adjustment over there afternoon London metal trading has become a case of tracking the DJI.

After the close at 18:15 the Fed FOMC interest rate decision is released with rates floating below 0.25% there is little room to slice rates further and other action will take time for the market to fathom.

Over the G20 finance ministers meeting in the UK attempt to paper over the cracks ahead of the heads of state meeting Apr2. In oil OPEC refrained from further production cuts while encouraging members to comply with previously agreed reductions. From this current Newsweek magazine edition see an article on China move into the hinterland, “China’s Money Flows West”.

The LME stocks saw ni break 100,000 tonnes while the general pattern was routine, al up with cu and zn down. Evidence that world trade continues to slow came from Singapore where Feb container transhipment continued to slide in February, down 6.3% from Jan and 19.8% yoy. Feb throughput came to 1.85 million twenty-foot equivalent units (TEUs), down from 2.31 million a year earlier and 1.97 million in January. This week the focus turns to the Fed FOMC meeting starting Tues. The Mch UK Rightmove house price index rose 0.9% (Feb +1.2%) and yoy -9.0 yoy (-9.1). The strength in equity markets gave the metals a firm foundation on which to move higher that took more shorts out of their comfort zone.

In the US the Feb NY Fed Empire State manufacturing index declined to -38.0 another record low (Jan -34.7). Then at 13:15 Feb industrial production was down 1.4% (-1.9%) and capacity utilisation 70.9% (71.9%). At the close the Mch National Association of Home Builders (NAHB) housing market index was unchanged at 9.0. The news today of how AIG distributed the bail out funds (US$ 170 billion) to over 80 entities shows why the US could not allow it to fall. As the fulcrum of the credit default swap market to let it fall would have imploded the financial system.

LME al stocks stand at 3,364,025 metric tonnes this is broken down a follows; the US 1,373,875 tonnes (41 %); Europe 1,078,825 tonnes (32%) and Far East 911,325 tonnes (27%). Throughout last year producers either finding demand slowing or circumspect about consumer creditworthiness as the financial crisis grew delivered surplus LME registered material into warehouse especially in the US. During Oct / Nov ’08 the contango benefit over finance was such that investors / traders borrowed LME warrants with a further benefit of locking them into warehouse deals, this effectively sanitised the material from the market.

For the warehouses their focus was to lock in ingot tonnage in the Far East. Warehouse operators did not have to offer deals in the US and limited in Europe as the material was unlikely to leave their locations anytime soon. Since Jan we have seen good demand for al warrants in Asia which has pushed the warrant premium for ingots up by 450%, this demand has now spilled into sows and T bars. Hence despite a very high total stock figure there is little ingot readily available in the area to meet genuine demand.

Under these circumstances LME premiums are likely to remain firm with producers and traders benefiting from the higher benchmark but below a level that would allow substitution from other locations. The major unknown is how much of the Far East material is bound up in long term deals and whether LME rent deals will be broken to capture premium.

By contrast cu 48% of LME stock is in Europe; 43% the US and 9% the Far East. With our expectation that Asia will lead any economic recovery we expect LME material to be diverted from that arena or sanitised.

The US equities put on a good shine with the DJI up3.5% and NASDAQ 4% this flowed into Asia as the Nikkei rose 5% in a general mood change. This was helped by China PM Wen Jiabao stressing the country had adequate ammunition to expand economic stimulus. He did express a worry about China’s holding of US Treasuries as the US deficit blows out but perhaps this was more a shot across the bows of those in America wanting to push them on the currency. In Japan Feb consumer confidence was 27.6 (Jan 27.0). So far China’s stimulus package is top of the league table being equivalent to 6% of GDP; US 4.8%; Germany 3.5%; Japan 2.2%; France 1.4% and UK who have made the most noose about it 1.3%. The Feb W European car registrations fell 17% yoy to 902 k units. The Feb German wholesale price index declined 1% (Jan -0.4%) yoy -5.7% (-5.9%). The Jan Euroland retail trade volumes rose 0.1% (Dec -0.3%).

Metals sluggish in Asia got a bust early London. Weekly Shanghai metals stocks all fell cu by 3733 tonnes to 34,735; al 22,784 tonnes at 176,942 and zn 1,111 tonnes at 65,861. The LME stocks dominated by a big jump in al (a pretty regular monthly occurrence as third Wed approaches) on the week cu dropped 24.5 kt just under the 500 kt mark; al up 97 kt; zn fell 7 kt; pb down 1.1 kt while ni and sn both up about 500 tonnes each. One got the feeling the markets just wanted to go home.

The Jan US trade balance narrowed to US$ 36.3 billion (Dec US$ 39.9 billion) as exports fell 5.7% (-6%) and imports down 6.7% (-5.5%). At 14:00 we saw more up to date data as the preliminary Mch Uni of Michigan consumer confidence index was 56.6 (Feb final 56.3), coincident reading 62.3 (65.5) and expectations 53.0 (50.5). In a slow afternoon the metals tracked the ebb and flow of the equities in light turnover with sellers on top.

G20 finance ministers meet in the UK over the weekend ahead of the Jamboree Apr 2; so far it seems the banner agreement will be a breaking down of bank secrecy laws, hardly the stuff of financial crisis solving.

On the week cu gave up 69, al rose 40, zn down 10, pb up 50, ni fell 150, sn down 740, gold off US$ 11 /oz, oil up US$ 2 / bbl, the DJI skipped up 550 points and 10 year US treasury bond yields pretty steady.

More evidence of the recent destruction of wealth caused by the recent financial upheaval was revealed today as the Norway state pension fund reported a ‘08 negative return on funds of 23.3% (€ 71.5 billion); this effectively offset the gains over the past decade. The country’s SWF invested in international stocks and bonds. This is a country that has been prudent and set aside earnings from its natural resource endowment, leaving one to wonder how other less fortunate nations will fair. There is growing concerns in political and security circles about possible growing social unrest in countries (both developed and emerging) worst effected by recent events.

Overnight saw a rash of central bank activity, Brazil cut its official rate 1.5% to 11.25% following a marked slowdown in Q4 growth and South Korea left rates unchanged and NZ reduced rates to 0.5% to 3%. Australian Feb unemployment rose to 5.2% (Jan 4.8%). In China Jan / Feb industrial production increased 3.8% yoy (Dec +5.7%), and retail sales for the same period rose 15.9% (+19%); while Feb new lending quadrupled to Yuan 1.07 billion with growing talk of a major shift in the country’s economic policy towards a “go it alone” domestic growth policy. This rapid increase in lending should see demand increase for capital goods from other countries in the Asian region especially Japan, South Korea and Taiwan and get the cogs of trade moving. In India Jan industrial production declined 0.5% yoy (Dec -0.6%).

In the metals the LME stocks were mixed small rises in cu and al against lights falls in the others with cancelled cu and zn warrants being moved out now 7% and 10% of total stocks respectively. The Chinese National Bureau of Statistics reported Feb refined cu output at 320 kt up 12% yoy; al 894 kt down 18%; zn 264 kt -4.3%; pb 204 kt +28%; ni 17,073 +44% and sn 4,503 tonnes -44%. Korean steelmaker Posco said it will increase capacity utilisation slightly to 85% on seasonal demand pick up and lower inventories. We are hearing anecdotally that the recent restocking buying out of China has filled the inventory pipelines and leftover material will swell Shanghai stocks. Indian alumina producer NALCO cancelled a tender for 10 kt of alumina quoting an inability to spare the production we hear it was simply the price was too low.

In Europe German Jan industrial production cratered -7.5% much more than expected (Dec -4.6%). The US weekly jobless claims rose 9 k to 654 k. Further Feb retail sales fell 0.1% less than feared (Jan +1%) as ex auto sales rose 0.7% much better than anticipated (+0.9%). The Jan business inventories fell 1.1% (-1.3%) continuing to move in the right direction. The US equities moved sharply higher and other commodities and the US$ were supportive of base metals which showed a marked reluctant to follow.

Reading a random book at the moment but in it was a paragraph that really puts the Chinese urban explosion into context, “There was too, a dramatic self confident expansion of urban Britain. London from around 500,000 inhabitants in 1700 had nearly doubled by 1800. Even more impressive in relative terms was the fourfold growth of Birmingham, Manchester and Leeds between 1700 and 1770. At the beginning of the century only seven towns- Newcastle, Bristol, Yarmouth, York, Exeter, Norwich and Colchester (Roman settlements – our comment) – had more than 10,000 people. By 1800 the number was more than 50. The urban population jumped from around a fifth in 1700 to a third in 1800, or about 2 million of England’s six million people”. During this time economic growth ebbed and flowed. This time last year those pushing Chinese urban development seemed to forget history.

The Citigroup news slammed shut a bear trap in US equities sending the DJI surging 5.8% and NASDAQ 7.1% which flowed into Asia though not with the same velocity with the Nikkei rising 4.5%. The weekly US ABC / Washington Post consumer sentiment index nudged up to -48 from previous -49. What was surprising was the reluctance of metals to push higher perhaps hampered by the shutting down of arb opportunities between LME / Shanghai. There was mixed economic data out of China the Feb trade surplus narrowed to US$ 4.8 billion (Jan US$ 28 bill), exports dropped 25.7% the biggest fall since ’95 (-17.5%) and imports off 24.1% (-43.1%). This was offset by Jan / Feb urban fixed asset investment rising 26.8% yoy. In Japan Jan machinery orders fell 3.2% (Dec -1.7%) and yoy off 39.5%.

On the metals front LME stocks dominated by cu falling 10 kt which reflects the moving out of cancelled warrants otherwise things were mundane. In Feb the Chinese imported 329 kt of refined cu up 41.5% on Jan and 45.5% yoy. The Zambian government is pushing Glencore to hand over the Mufulira and Nkana cu mines to the state after putting them into care and maintenance till the price improves. The mining industry has been hit hard there and there is a risk another mine Mopani might follow.

In Europe German Jan PPI fell 1.2% (Dec -1%) yoy rising 2% (+4.3%) while their total manufacturing orders dived 8% (-7.6%) as domestic orders declined 4.3% and foreign orders 11.4% yoy they showed a 37.9% setback the worst since ’91 (-28.2%). There seemed to be follow through buying about on the metals which dried up mid morning. The US saw the equities rise but by then sellers were on top of the metals pushing them lower. A day of narrow ranges in the metals with a tail of weakness, especially in cu, at the close.

Asian market remain steady as a raft of Chinese data appeared, the Feb CPI fell 1.6% yoy the first fall since ’02 to put it in context it must be remembered Feb last year saw the same series hit an 11 year high, food prices fell 1.9% while pork prices declined 18.9% (last year there were worries about food riots as that price rose over 40%). The Feb PPI fell 4.5% yoy as global commodity prices suffered significant declines. The National Development and Reform Committee reported new home sales fell 1.8% while price in the 70 largest cities were off 1.2% (Shenzhen prices in the South prices fell 15% yoy with reports the Guangdong area saw 40% factories extend Lunar Holiday, the region accounts for 12% of the country’s GDP). Recent anecdotal evidence is house sales have picked up and prices recovered as the government floods the country with liquidity. Feb vehicle sales rose 25% to 827 k units after tax breaks on smaller cars. We hear tyre manufacturers report good domestic demand against poor export orders.

In Japan Jan preliminary leading economic indicators index was 77.1 (Dec 80.0) and coincident index 89.6 (92.4). The weakening yen we believe is an important sign to decline in world growth levelling out, as Japan is a lynch pin as a major capital goods manufacturer. As the country becomes more export competitive so the wheels of commerce begin to turn again. In Europe remains in the mire, French Jan industrial production fell 3.1% (Dec -1.5%) and UK manufacturing output was off 2.9% (-1.9%) and yoy falling 12.8% while industrial production declined 2.6% (-1.7%) and yoy off 11.4%. Stronger European equities and higher US equity futures saw buyers push metals higher.

On the metals front, the LME stocks swing around a little al rose it usual tonnage while cu declined 6675 tonnes with all the others showing small declines. The zn cancelled warrants declined now 10% of total stock. Chilean cu producer Antofagasta reported ’09 output will decline 9% to 433 kt with a 15% fall in operating costs. Forward looking by 2011 they expect to produce 700 kt of cu as new mines and expansions kick in. Reflecting the demand in Asia for al the latest tender of 4,500 tonnes of al ingots by the Indian smelter NALCO went at a premium of US$ 55 / tonne for Apr to Jne shipment. The rise in al premium is reported to be putting some warrant deal in jeopardy.

Lack of US data saw markets slavishly follow the equities and a quick 250 point rally in the DJI pushed them to their highs. The equities were driven on by a bullish trading outlook from Citigroup. The Jan wholesale inventories decreased by 0.7% better than expected (Dec -1.7%) as sales dropped 2.9% which means sales are falling faster than inventories leaving the putting the inventory to sales ratio at 1.30 the highest since Jan ’02. The strength in equities kept the metals boiling as the technicals turn higher.

The focus is now on the G20 economic summit in London Apr 2 and the danger of no concrete outcome is well summed up by Irwin Stelzer in the Sunday Times Mch 8 edition “The G20 meeting will undoubtedly end with a communiqué promising international co operation to revive the world economy. That won’t do. Vague statements of good intentions, with no specifics, demonstrate that the authorities have no idea what to do. Animal spirits are dampened. The markets sell off. That could well be the effect if the G20 fails to come up with a specific recovery plan. Which is likely. After all, the members of the EU can’t even agree amongst themselves on an anti recession package”. The World Bank in a pessimistic report over the weekend predicted the global economy could shrink for the first time since 1945; more detail appears in a semi annual report expected mid Apr.

Metal price having lost some of last week’s lustre Fri continued to ease back in light Asian trading as traders digested a recent succession of poor data reports. The LME stocks saw cu fall while the other registered increases led by a modest al rise, zn cancelled warrants remain at 12%. With no economic data and little by way of metal fundamental news it looks like the winds to blow anywhere. The interest has been in pb today as investors concentrate on a metal where all the stock is in Europe or the US; total LME stock levels are relatively low compared to the others and demand seems to have held up.

The US clocks went back over the weekend and there was no economic data to liven matters up. The US equities are juggling either side of unchanged and metal ultra sensitive to this action.

Equities took another battering as investor confidence crumbles, with GM auditors questioning its accounts, wrangling over how the UK government will bail out Lloyds Bank (amazing Mr Brown pushed Lloyds into buying the ailing HBOS bank waiving competition rules only for Lloyds to discover their due diligence had not picked up the rotten core of the matchmakers bride. The result shareholders in the well run Lloyds lose and the government wants a bigger share of the bank they set up). The BoE has turned to quantitative easing printing £stg to buy UK Gilts from the banks to try and boost money supply. Finally it seems Brown’s big idea for the G20 economic conference in London Apr 2 is a worldwide cap on bank executive remuneration, that’s about all he will get agreement on. The western financial system is in a mess and does not look like getting better soon, just wait for the next shoe to drop.

Asian volumes were thin with few LME / Shanghai arbitrage opportunities around, however fresh momentum fund buying was quickly in evidence during London time pushing several to new highs. Could not see any updated weekly Shanghai stock data. The LME stocks continued to follow the recent trend, al in, cu and zn out with the others mixed. On the week cu declined 20 kt; al rose 58 kt; zn down 10 kt; pb off 450 tonnes; ni up 1 kt and sn rose 200 tonnes. The Jan OECD leading economic indicators showed the world economy continuing to weaken, OECD area declined 0.9 points in Jan and was 9.1 points lower than Jan ’08; US -1.4 / -10.8; Euroland -0.6 / -8.4; Germany -1.2 / -12.7; Japan -1.5 / -9.6 and UK -0.3 / -6.7. In the emerging markets a similar pattern Brazil -2.7 / -10.1; Russia -3.3 / -19.4; India -1.0 / -9.6 and China -2.1 / -14.8.

The Feb US non farm payrolls declined 651 k (Jan revised to -655 from -598 k), manufacturing jobs fell 168 k and service producing jobs declined 375 k. The unemployment rate increased to 8.1% (7.6%). Market sensed it was the end of the week.

Over the week cu jumped 303, al down 30, zn up 103, pb rose 145, ni fell 50, sn increased 150, gold off US$ 1 / oz, oil up US$ 0.5 / bbl, DJI slipped 450 points and US 10 year bond yields declined 0.18%.

Overnight there were economic reports from the two most important economies. The US Federal Reserve issued the Beige Book ahead of the Mch 17 FOMC meeting reporting that national economic conditions deteriorated further during the reporting period Jan through late Feb. The deterioration was broad based with basic food and pharmaceuticals the exception. Looking ahead they rate the prospects for near term improvement in conditions as poor and no significant pickup expected till late ’09 into ’10.

The Chinese Premier addressing the National People’s Congress did not announce any new spending, targeted ’09 growth at 8%. To achieve this he emphasised the bolstering of consumer demand as a long term strategic principle for stimulating economic growth and reiterated a 17% increase in social safety net programs. For Asia to develop domestic consumer demand orientated economies governments need to strengthen their social security net to encourage people to loosen their purse strings. Ahead of the G20 Apr 2 summit in London see a good article by an ex Australian PM in the FT, Mch 5 edition “A chance to remake the global financial system” as to what it should seek to achieve (www.ft.com).

It is reported China’s largest cu smelter Jiangxi, said the lack of scrap raw material is threatening its plan to raise production this year by 14 percent to 800 ktpa. The company had to close a 50kt plant because of the lack of scrap reflected by a sharp decline in Jan scrap imports. The LME stocks saw the general pattern continue on lower tonnage. Zn cancelled warrants rose 5625 to 12% of the total, cu cancelled fell and al rose 4700 tonnes. In Europe, Jan German retail sales fell 0.6% (Dec +0.1%) yoy -1.3% (+0.8%), Q4 French unemployment rose to 8.2% (Q3 7.6%). The Euroland Q4 GDP was revised to -1.5% (Q3 -0.2%)

The BoE cut rates 0.5% to 0.5% and the ECB followed reducing rates to 1.5% from 2%. In the US the weekly jobless claims were 639 k from previous 670 k and Q4 non farm productivity down 0.4% from the advanced +3.2% estimate, the average for ’08 was 2.8% the highest in four years. The Q4 unit labour cost rose 5.7% from the advanced estimate of+1.8%. The decline of European equities gathered pace as a news article appeared in the US saying auditors raised doubts about General Motor’s economic viability. At 15:00 Jan factory orders were reported down 1.9% half the expected decline (Dec revised to -4.9 from -3.9%) ex transport -0.9% (-5.4%). The metals held up well as the US equities hit the skids.

Common consensus and LME stock levels point toward an over supply of base metals in the present economic environment. However, in recent weeks there has been significant buying of LME warrants and this activity has been attributed to arbitrage activity between the LME and Shanghai. We are always concerned when an overarching reason for metal activity becomes folklore. So amongst all this metal activity, which for the moment is carrying prices higher, is the perceived understanding of the present metal supply situation WRONG? Have analysts underestimated the decrease in production over the past twelve months and the amount of LME material locked up in financing deals; just as they miscalculated the amount of demand destruction hidden by investment commodity frenzy of H1’08. We believe demand will reappear by stealth just as it fell away and if production cuts have been underestimated prices could surprise. We would welcome any comment on this subject.

The US weekly ABC / Washington Post consumer sentiment index was -49 (-48) as Feb auto sales declined 41% yoy to 688 k units (GM -53%, Ford -48%, Chrysler -44%, Toyota -40%, Honda -38% & Nissan -35%) this equates on an annualised basis to 9.1 million units (Jan 9.6 million and Feb ’08 15.4 million units). The official Chinese Feb manufacturing PMI improved to 49 (Jan 45.3), the new orders reading was 50.4 signalling expansion in that area. The Indonesian central bank cut rates to 7.75% from 8.25%. In Australia Q4 GDP contracted 0.5% against an expected rise (Q3 +0.1%). The headline figure of the day is Feb service PMI data, Russia 40.0 (36.8), Italy 37.9 (41.1), France 40.2 (42.6), Germany 41.3 (45.2), Euroland 39.2 (42.2) and UK 43.2 (43.2 (42.5). The US non manufacturing composite PMI was 41.6 (42.9). It is perhaps no surprise the service sector is lagging the manufacturing arena in the downturn.

A steady overall financial environment saw metals advance in Asian time led by cu approaching its 100 dma resistance at 3650. With the rising demand for cu in China signposted by high LME warrant traffic the Japan’s Pan Pacific Copper is reviewing stepping up production at its smelter from Apr reversing a 10% imposed since Jan. This coincides with reports of a tight cu scrap market in China reducing domestic refining. The LME stocks saw the usual al in while cu, zn and pb shipped out. Cu encouragingly saw Korea move 2325 and cancel 12,650 while small tonnage from seven different areas in Europe and Asia; zn out of Asia 3725 & into NO 1650 with pb out of Sing and cancelled in Antwerp. The IMF has downgraded ’09 African economic growth to 3.3% from 6.3% in Dec.

Ahead of the non farm payrolls Fri the Feb Challenger, Grey & Christmas job survey showed employers cut 23% fewer jobs at 158 k than Jan (241k) and Feb ADP private employment survey showed losses were 697 k (Jan revised to -614 k from -522 k). The US markets were buoyed by expectations the Chinese Premier Wen Jiabao will increase the stimulus of the economy, sending cu above 3700, oil over US$ 44 / bbl and yen over 99. He addresses the National Peoples Congress tomorrow and is expected to set an 8% GDP growth target for ’09.