Against the Grain

After the head long price charge at the start of the week caution set in over the past 24 hours ahead of the US employment data. In Asia the Shanghai equity market had its biggest weekly fall since Feb (4.5%) as a the country’s second largest bank said it will cut new lending by up to 70% in 2H to avert a surge in bad debts. There has also been a stream of stories cautioning that commodity prices have gone too far too fast; the Baltic freight index has fallen, investment banks has issued reports encouraging profit taking, Shanghai steel futures have had a sharp pullback and the US$ sell off has slowed. All this could be ancient history after the US Jul employment data below.

On the week metal stocks rose across the board, in Shanghai cu 12,299 tonnes to 63,434; al 1165 tonnes to 181,606 and zn 7622 tonnes at 109,891. At the LME cu 11 kt; al 2 kt; zn 30 kt; pb 6.5 kt; ni 156 tonnes and sn 265 tonnes. Recently there has been a lot more fundamental news on the wires here is a taste; State owned Chinese research group Antaike says the country’s refined zinc production may reach an all-time record in the Q3 following the start up of 300 kt of new annual capacity and greater use of existing capacity due to high prices. They said refined zinc output will rise to a record 400 kt per month in the Q3, as official data showed refined zinc output reached an 11-month high of 366 kt in Jne. Since then, two new 100 kt facilities have come on stream, and another 100 kt of capacity is due this month. China’s total zinc stocks crossed 500 kt in Aug, up from an average 350 kt Q1. Local inventories rose on increased domestic output and zinc plants an H1 600% rise in refined imports to 479 kt. H1 total production fell 1.2% to 1.89 million tonnes as operating rates were 60 / 70% and now up to 90%. In Europe Lundin Mining has restarted the zn expansion project at its Neves-Corvo mine in Portugal after halting the work in Nov ’08. In cu production problems continue, Equinox Minerals has cut its ‘09 production estimate at their Lumwana mine in Zambia to 120 kt of cu in concentrate (170 kt) and raised its cost expectations (US$ 1.35 / 1.50 c/lb from 1.15) on start up problems. The Chinese al smelter Sichuan Aostar Aluminium will continued production at below 40% capacity or 90 ktpa worried by the demand outlook. Short term disruption are also increase Inco has a strike in Canada and protests in Indonesia while Antofagasta had a Los Pelambres in Chile. The recent ni price jump could see imports fall 30% in Jul from Jne 41kt. In the pre market zn traded above pb. One thing doing better than the metals, sugar at a 28 year high up 68% on the year.

On the economic data front Italian Q2 GDP declined 0.5% a major cause of the continued contraction is slow consumer spending (Q1 -2.7%) and yoy -6.0%. The Jul UK input PPI fell 1.4% (Jne +0.5%) yoy -12.2% (-11.8%) and output prices rose 0.3% (0%) and yoy -1.3% yoy -1%. In Germany Jne exports rose 7% well above estimates as Asian capital goods demand recovered (+0.2%). Despite the surge in  exports Jne German industrial production unexpectedly fell 0.1% (May +4.3%) yoy down 18.1% (-17.9%). The Jne OECD area composite leading indicators rose 1.2 points to being 5.0 points lower than Jne ’08 (US +1.3 / -7.2; Euroland +1.5 / -1.6; Germany +1.7 / -6.6; UK +1.1 / -0.9 and Japan -0.3 / -12.7). The BRIC area China +1.4 / -3.7; India +1.2 / -3.4; Russia +1.2 / -17.7 and Brazil +0.4 / -11.4.

In the US the Congress approved a US$ 2 billion increase in the “cash for clunkers” car program after the first US$ 1 billion ran out in 6 days. The Jul non farm payrolls fell 247 k (Jne 443 k) and unemployment rate fell to 9.4% as 400 k people gave up looking for jobs and left the workforce! (9.5%). After that the simple rule applied “NEVER BE SHORT ON A FRIDAY AFTERNOON”, then the US$ strengthened offset by the DJI bolted higher.

Another towering week for the metals cu jumped 428, al 133, zn 150, pb 25, ni 1750, sn 900, gold US$ 8 / oz, oil US$ 4.5 / bbl, DJI at writing up 230 points, US 10 year bond yields rose 0.34% and the US$ up on the week.