Against the Grain

Being on the periphery of the metals it is not till you talk to large investment banks you realise the sheer magnitude of investment money that has and is being poured into the sector and under this flow how irrelevant the state of the traditional physical market is compared to it. The perception that commodities are the “return” asset class (specifically metals) has seen long only investors supreme and explains why there are no sellers in down moves. They are not going to sell, they will suffer wealth destruction but not liquidate unless events change. This is not confined to large investors (SWF etc), while al has seen large LME financing cash and carries we hear private Chinese investors are holding quantities of cu and ni in a more opaque fashion (maybe no surprise that since the Shanghai stock market fell 5% in a day a week ago after the PBoC hinted at tighter credit Shanghai exchange cu stocks have risen sharply). The financial investors are the wave and real users the flotsam riding it. On Mon we will have a stab at what might burst the bubble.

The markets subdued in Asia as the Jne Japanese tertiary industry index improved to +0.1% (May -0.1%). The closely watched Chinese power demand was reported by the National Energy Administration to have risen 6% in Jul while down 0.9% in year to Jul. In Q2 the Hong Kong economy grew by 3.3% (-4.3%) with its Hang Sang equity market has rallied 84% from its Mch low. On the stock front the weekly Shanghai stocks saw cu rise 12,673 tonnes to 76,107; al dipped 238 tonnes to 181,368 and zn rose 5840 tonnes to 115,731. On the LME there were moderate weekly changes cu up 750 tonnes; al down 6 kt ahead of third Wed this is very unusual; zn down 1.3 kt; pb up 1.8 kt; ni up 2 kt despite the price hike and strike and sn increased 464 tonnes. Chile’s Codelco, in H1 produced 783 kt of cu up 16% yoy with all divisions performing especially the Gaby mine. On top of this its 49% share in El Abra mine rose 15% to 822 kt. This could not stop profit for the period slumping 82% against ’08. Following a pb poison outbreak China’s Dongling Lead and Zinc Smelter in northwest Shaanxi closed 100 kt capacity plant (70 kt zn and 30 kt pb) of its total 280 ktpa combined output. As the spot iron ore price rises a Chinese steel mill Hebei Jinya has advertised in the Australian media for material.

In Europe the Jul Euroland CPI fell 0.7% (+0.2%) yoy -0.7% (-0.6%) as core figure rose 1.3% yoy (+1.4%). In the old Eastern bloc EU members the Czech economy contracted 4.9% in Q2. The morning session felt like the calm before a US storm. Western Europe Jul car registrations rose 5% while in the year to Jul they are down 8% on ’08.

Quite a flow of US data to absorb, Jul CPI flat (+0.7%) yoy -2.1% (-1.4%) lowest since Jan 1950, ex food and energy rose 0.1% (+0.2%) & yoy +1.5% (+1.7%). At 14:15 Jul industrial production rose 0.5% as expected (-0.4%) yoy -13.1% and capacity utilisation up to 68.5% (68.0%). Then finally at 15:00 a consumer (un)happiness reading the Aug preliminary Uni of Michigan consumer confidence 63.2 (Jul 66.0). In some ways governments tempting customers with what the auto industry has been doing for decades, cheap cars for nothing and look what happened to them, someone had to come to the rescue!

On the week only the red metal survived the late rot – cu up 80, al fell 37, zn off 64, pb down 43, ni rose 25, sn down 225, gold off US$ 12 / oz, oil dropped US$ 4.55 / bbl, at time of writing the DJI down 134 and US 10 year bond yields declined 0.34 % with the US$ unchanged.