Against the Grain

Our approach is simple as the market works itself into its occasional “boom” or “doom” frenzies we begin to question the reasons for each excitement. Just as we saw signs back last July that financial investors were to bullish on metals so by Dec it was clear they had become far too pessimistic. Now we believe they have committed the same crime as last Jul by racing metal prices ahead of reality. As China is the foundation of this enthusiasm and we agree the most likely cog to get the world economy turning lets have a look there. I have just started reading a book on China by John Keay, “China a history” published by Harpers Press in the introduction I was disconcerted to have three myths exposed -the Great Wall is not a great wall, the Great Canal was not a great canal and Mao’s Long March was more propaganda than plimsoll. Then someone recommended I read the attached AEI article by John Makin “China: Bogus Boom?” which questions the recent growth spurt (http://www.aei.org/outlook/100061). Finally add the saga of Rio Tinto to the mix and our feeling is the China might not be the “white knight” people are hoping for, or as a contact of ours there warned us several months ago “China should not be looked at as the saviour of the western economies”.

Very quiet in Asia with some selling of the metals as the € 1.41 was tested as London began some profit taking about as trend and index buyers take stock. However one still gets the feeling the bulls are the dominant beast in the arena as the over bought technical picture has abated. The LME stocks remain irrelevant to present proceeding but expect them to take centre stage when you least expect it. Reading a Dow Jones al article y/day it gave the impression there is about 7 million tonnes of al in various stock piles around the world from visible exchange stocks to more opaque producer stocks so suspect in the dark depth of squirreled away stocks there could be even more. Visible al stocks amount to about 8 weeks of world al consumption (compared to cu at 3 weeks). At a press brief the BHPBilliton CEO said underlying demand for commodities was likely to be obscured by movements in inventories. The Escondida mine operated by BHPBilliton lifted force majeure on deliveries imposed in Spt  after a mechanical problem reduced its cu, resulting in a 50% decline in H1 ’09 output at 358 kt. concentrate capacity. China’s Zhuzhou smelter reported an 8.9% increase in pb / zn H1 to 260 kt yoy as net profits plunged 84%. The Brazilian miner Vale has reported its Thompson, Manitoba nickel operations in Canada are shut for maintenance during Aug as their Voisey’s Bay and Sudbury operations currently shut due to labour stoppages, it means their entire Canadian ni operations are currently shut. As the pre market ended metals joined in a general recovery as the US$ lost ground against the € as traders look ahead to Fed confirming rate will remain low.

The Japanese Jul PPI fell 8.5% yoy (Jne -6.7%) and Jne industrial production rose 2.3% (2.4%) still down 23.5% yoy (23.4%). while Aug Australian consumer sentiment rose 3.7% to 113.4. In Europe the BoE says inflation is expected to be below 2% as economy endures a slow recovery as the unemployment rate for the Jne hit 7.8% (7.7%). The Jne Euroland industrial production fell 0.6% (+0.6%) that is -17% yoy (-17.6%).

In the US the weekly ABC / Washington Post consumer sentiment index improved to -47 from previous -49. The Jun trade deficit was US$ 27 billion as expected (May 26.0 billion). Then at 15:30 the volatile US weekly oil stocks saw oil off its high as metals followed a strong equity run. The US NAR reported house prices declined 15.6% in Q2 yoy as foreclosures hit values. Today’s action has taken prices back to around their opening levels y/day, the mid week correction quickly taken out with the low at 08:00 and high 17:00 close.