Against the Grain

With very little change in the macro picture cu pulled back overnight as the largest cu producer in China, Jiangxi, repeated what Tongling Nonferrous said in early Mch, the country’s cu demand will slow this year as the government cuts spending on the power industry by 25% (the industry accounts for 45% of the country’s usage).

The news above took the edge off other metals except ni and sn then in London the US$ weakened a tad and metals recovered. The LME stocks were back to routine, over Q1 cu stocks have risen 2.4%; al dipped 0.6%; zn rose 11%; pb jumped 20%; ni off 1% and sn down 9%. In Peru workers are planning a strike the Freeport Cerro Verde cu mine could see it called unlawful. The poor US Mch ADP employment data below saw the US$ weaken above € 1.35 and boosted metals (cu to ’10 high) and gold.

In Asia Japan’s Mch manufacturing PMI was 52.4 (52.5), with Mch small business confidence at 45.8 (42.3) and Feb housing starts down 9.3% yoy (-8.1%) with construction orders falling 20.3% (15.7%). The South Korean Feb industrial production rose 3.6% (Jan unchanged). In Australia after several rate rises Feb retail sales fell 1.4% (Jan +1.1%) with building approvals off 3.3% (-5.5%), yoy +34.2% (52.7%). The Mch UK GfK consumer confidence dipped to -15 (Feb -14). The Mch German unemployment declined to 8% (8.1%) while Feb Euroland unemployment up to 10% (9.9%).

Overnight the US weekly ABC consumer confidence retreated further -45 (-44). The weekly MBA mortgage applications rose 1.3% (-4.2%). The Mch ADP private sector employment survey was a shock registering a fall of 23 k (Feb -24 k), it was expected to be in the black at +40 k and suspect will see some hurried re evaluations of the estimates for nonfarm payrolls Fri estimated at 190 k area. Then the Mch Chicago PMI disappointed 58.8 (62.6), Feb factory orders up 0.3% (Jan revised to +2.5% from +1.7%) with durable goods revised to +0.9% from +0.5% and Milwaukee NAPM jumped to 62 (56.0). Finally we got the weekly DoE crude oil inventories that rose more than expected but if anything like LME metal stock are not in the present investment mix. With the US$ weakening the metals settled into some solid end of month / quarter window dressing.

At 17:00 the ups and downs of the quarter have been; cu rose 5.5%, al up 4%, zn down 8.5%, pb fell 11.5%, the winner is ni jumping 33%, sn rose 8.5%, gold +1%, oil +4.5%, DJI +4.5%, US$ / € +5.5%, bonds unchanged and Shanghai equities up 10%. As an aside sugar that hit a 29 year high mid Feb is down 34%, while non exchange iron ore and coal have posted significant rises.

What has fuelled the recent general market advance in the past fortnight? We suspect a general confirmation by Western central banks they will keep interest rates low into the foreseeable future (which could be defined as Q3) combined with an expectation that a broad recovery has gathered momentum. Therefore investors have a ready supply of cheap cash to chase opportunities but we suspect the time horizon will remain very short in case the landscape changes (such as occurred in early Feb when the trap door opened). What many call

The weakening US$ caught up with cu in Asian time, as the latter remained unchanged (y/days 7800 was the years high surpassing 7795 on Jan 07 before it slumped to 6225). The 40 year old annual iron ore contract appears to be a thing of the past as Japanese steelmakers agreed a quarterly contract price of US$ 110 / tonne with Vale and BHPBilliton, that is a 90% increase (we heard y/day spot iron ore was trading at US$ 160 / tonne). It is easier for the Japanese to accept this change as they have been buying al on that basis for some time. The routine of LME stocks was disrupted by a surprise jump in al (into NO) with pb having another rise (mostly Europe and US). On al we hear that financing deals entered into a year ago are rolling into a new deal where off warrant material must be put onto the LME for a period of time. In this environment no impact what so ever as investors seem be in command. Chile Feb cu output grew 3.8% to 395 kt. After y/days charge commodities struggled in the pre market as the US$ clawed its way back from early lows (€ 1.353). The awakening of the US saw prices quickly testing the highs.

In Asia, Japanese Feb unemployment steady at 4.9% as industrial production fell 0.9% (+2.7%), yoy +31.3% (+18.5%) and vehicle production yoy jumped 74.9% (+30.7%). In the UK Mch Nationwide house prices rose 0.7% (-0.8%), yoy +9% (+9.2%) as mortgage approvals hit a nine month low. Then the final Q4 UK GDP edged up to 0.4% (0.3%) and yoy -3.1% (-3.3%). Y/day Greece sold €5 billion, 7 year bond at 5.9% (325 basis points over equivalent German bunds) without much cover.

The US Jan Case-Shiller home price index 145.3 (145.9) with the composite 20 city reading rose 0.32% (+0.34%), yoy -0.7% (-3.1%). Then some up to date data the Mch Conference Board consumer confidence 52.5 (Feb 46.0). Better figures overall and with Mch nonfarm payrolls expected to rise by upwards of 190 k we had the unusual situation of the US$ and base metals strengthening (except pb) as the DJI gave up ground and gold fell.

As quite often happens after a period of dormancy cu sprang into life in Asia rising over US$ 150 from Fri close joined by ni that charged US$ 800 higher. Suspect the reasons were a combination of currency (US$ weaker); Shanghai / LME arbitrage (better Select volume); we are entering the end of month window dressing and anticipation of US employment data Fri (Good Fri - most of Europe is closed so expect “real fireworks”, you could see cu move US$ 200 in any direction – as usual when one or more exchanges are closed traders take advantage, and Mon!) and finally an 6.2 earthquake in northern Chile with no damage reports to cu production (at time of writing). It must be remembered the production facilities in the region have been constructed and operated with a quake threat in mind.

The metals struggled to move in early London but suspect the momentum is upwards. The LME stocks routine with most significant moves being rises in pb (Hamburg) and ni (Rott). In China overnight four Rio Tinto iron ore division employees were found guilty and sentenced to long jail terms. In cu European producer Boliden has entered a three year contract to sell China’s Minmetals 36 kt. The ni rally took place as BHPBilliton said its Kwinana ni refinery has restarted after a 10 day closure. In pb / zn the Yunnan province drought story is gathering press momentum since it broke a fortnight ago. The US opened with stop loss buying pushing cu over 7700, as they blaze their own trail ahead of the US$.

On the data front all eyes are on the US and Fri. In Japan Feb retail sales rose 0.9% against an expected fall (Jan +2%), yoy +4.2% (+2.3%). The Feb Australian new home sales fell 5.2% (Jan +9.2%). The Euroland Mch economic confidence improved 97.7 (95.9), industrial confidence -10 (-13); service confidence unchanged at 1; consumer confidence unchanged at -17.

US data is back to the normal time as our clocks moved, at 13:30, Feb personal income unchanged (+0.3%), personal spending rose 0.3% (+0.4%) and savings declined to 3.1% the lowest since Oct ’08. Saw an ad in the NYT were the financial group’s selling point was “144 years without government bailout money”. The afternoon saw the metals track higher as it becomes clear there is money to invest and if the economic outlook is poor the metals are a good safe haven and if things look good then demand for metals will rise – a win, win situation (cu finished on its high up US$ 275 from Fri close).

When we left the office Thurs the DJI was a healthy 100 points up however this rally faded and by the NY close it was unchanged on the day. While the 16 European members of the € group agreed to put in place a bail out mechanism which includes input from the IMF, a clear policy victory for Germany. The market reaction to all of this, very little, with the DJI unchanged and US$ steady others sat on the sidelines and watched. At the start of the week we attended the UNCTAD Global Commodities Forum with much of it dominated by the great and the good of exchanges trying to hold the status quo against the threat of new regulation, expect this topic to grow over the course of this year.

The metals edged higher in Asia led by cu and ni having good Select volumes. The weekly Shanghai stocks saw cu decline 13,636 tonnes to 155,465; al rose 12,365 tonnes to 406,693 and zn jumped 20,738 tonnes to 244,191. In China the Lead-acid Battery Association expects battery output will rise 25% which could up pb demand by 20%, with recycling expected to increase by 50% to 1.5 million tonnes. The recent boom in battery bicycles and cars will in the coming years see the recycling share grow even faster. In the US pb recycling runs at over 80%. While the China Nonferrous Metal Industry Association estimates al scrap will rise 87% to 2.8 million tonnes by 2015. Routine daily LME stocks meant that on the week cu fell 6 kt; al declined 32 kt; zn rose 2 kt; pb up 1250 tonnes; ni down 1798 tonnes and sn increased 130 tonnes. In the pre market a weaker US$, need we say more. News that a South Korean naval vessel was sinking near North Korea saw gold back above US$ 1100.

The Feb Japanese CPI declined 1.1% yoy (Jan -1.3%), that is the twelve months in a row they have deflated. Into Europe the Mch French consumer confidence survey drifted to -34 (Feb -33).

In the US, Q4 GDP was wound back to 5.6% (5.9%). At 14:00 the final Mch Uni of Michigan consumer confidence was unchanged at 73.6; current conditions rose 82.4 (81.8); expectations declined 67.9 (68.4). On the international front the US and Russia agreed a new nuclear arms reduction treaty to be signed in Prague Apr 6. It replaces the 1991 Strategic Arms Reduction Treaty and reduces warheads by around 30% to 1550 each. The scrapping will add U3O8 supply, look at the chart on BBC website, http://news.bbc.co.uk/1/hi/world/europe/8589385.stm . Very quickly after this news the US$ and DJI were driving market direction. Over the week the most concerning move has been the rise in US Treasury yields, should this continue it could reflect investor concerns about the state of US finances, the move referred to by former Fed Chairman Greenspan as a “canary in the mine”.

Tepid sort of week cu up 63, al down 36, zn off 57, pb slipped 92, ni jumped 1120, sn dipped 100, gold down US$ 6 / oz, oil off US$ 0.7 / bbl, the DJI at time of writing up 133 points, US 10 year bond yields rose 0.19%, US$ / € stronger by 0.014 and Shanghai equities down 14 points.

Been travelling for the past few days but macro wise nothing seems to have changed with the US$ and DJI dominating the metal direction. Metals came out of Asia on a weaker note as schisms in the EU family of nations over money continue to hit the €. With Portugal joining Greece having its sovereign debt rating reduced. In the US we saw a strong rise in treasury bond yields as a recent tender met investor resistance, 10 years moved to 3.82% from 3.69%. Then in London time is was announced the US healthcare bill has to head back to Congress for another vote after some procedural errors in it.

The metals were on the defensive early then turned higher as the US$ weakened after German Chancellor Merkel supported a Greek support package including IMF support. The LME stocks are back into their recently monthly routine led by al receding after the recent deluge. On the physical front attention has turned to Europe as companies look to restock after a fairly harsh winter. In excess cold foundries and other process have to take a break and we heard quite a bit of that happened. A ICSG report earlier this week pointed out the cu mine capacity utilisation was at 80.6% last year (recent high 90.8% ’04) with refinery capacity at 78% (’06 high 83.9%). In Peru unions have threatened to strike Mch 31 including Freeport’s Cerro Verde SXEW cu mine, by law companies must share 8% of their profits with employees and unions think they are under reporting earnings. The second ring coincided with US weekly jobless data and a recovery in the US$.

The dreary pre election UK budget was overshadowed this morning by some strong Feb retails sales data rising 2.1% driven by higher energy demand (Jan -3%) and yoy +3.5% (-0.8%) and sparking a £stg recovery. Now roll on the election to get the politicians off the scene. In Europe Apr German GfK consumer confidence was unchanged at 3.2 and Feb French consumer spending fell 1.2% (-2.5%) yoy +1.6% (+1.5%). Not much better in Italy were Jan retail sales slipped 0.5% (0%) yoy -2.6% (+0.5%).

The only data from the US weekly jobless claims 442 k (456 k). To catch up the weekly ABC consumer sentiment survey slipped to -44 after the previous strong gain to -43. Feb durable goods orders rose 0.5% (+3.9%). Ex transportation +0.9% (-0.6%) and Feb new home sales declined 2.2% to 308 k (-8.7% at 315 k), the lowest level since records began in 1963. Before Congress Fed Chairman Bernanke reaffirmed rates will remain low. With little else about the US$ and DJI called the shots, with the metals electing to follow the latter.

Light volume on Select overnight as cu and ni outperformed the moves in equities and currencies. The Shanghai weekly stocks saw cu rise 13,632 tonnes to 169,101; al increased 6779 tonnes to 394,328 and zn was unchanged 223,433 tonnes. As we forecast y/day LME al stocks are falling again and will continue to do so till the Apr third Wed the others unexciting. A mixed week overall cu off 10 kt; al jumped 93 kt; zn rose 1 kt; pb up 250 tonnes; ni fell 1220 tonnes and sn increased 300 tonnes. In China a blast has halted smelting at the state owned Dongxing al smelter in Gansu province (180 ktpa and planning to double). The metal consultancy Brook Hunt predicts a ni deficit of 10 ktbut returning to surplus the following three years (CRU also looking at a deficit). From Apr 1 China has a new rules on cu scrap importsrequiring imports to be based on international specifications. In an interview with Bloomberg Luvata, the maker of copper components expects demand to recover 10% this year after falling 24% on ’09, as consumer reduced inventories and substituted al for cu. The US accounts for 45% of their sales and Asia 30%.

Another very quiet pre market with continued firm equities supporting the metals and trumping the US$ strength. Then the equities got cold feet and the double D effect kicked in sending most prices back to unchanged on the week.

In Asia the Indian Reserve Bank raised rate to 3.5% from 3.25%, the first rise since Jul ’08 as inflation threatens. China  today unveiled its first domestically developed civilian helicopter. In Europe Feb German producer prices were flat (Jan +0.8%) yoy -2.9% (-3.4%). Then Jan industrial orders down 2.8% (Dec +4.7%) yoy +1.1% (+10.1%) with industrial sales +2.7% (+2.2%) yoy +5.1% (-2.5%).

No US data while Jan Canadian retails sales rose 0.7% (+0.4%).

Over the week cu +2, al +3, zn -47, pb -50, ni +790, sn +175, gold up US$ 4 / oz, oil down US$ 0.8 / bbl, DJI +110 points, US 10 year bond yield down 0.06%, US$ / € gained 0.025 and Shanghai rose 54 points.

Comments from the bosom of democracy, Greece lifted the US$ and pressured the € as a spokesman down played EU support and said they might have to go off to the IMF - suspect its posturing ahead EU meeting next week. The Greek PM has said he wants the financial aid mechanism crafted before EU summit meeting Mch 25. The Newsweek magazine Mch 22 edition has a good article “Its China’s World We’re just Living in It”, (http://www.newsweek.com/id/234928). Bloomberg had an article headed “Wall Street’s contribution to the debate on how to curb global warming – buy coal, sell solar”. Pointing out the Stove global coal index is up 6.5% in 2010 and Bloomberg global leaders solar index -17%. We suspect better summarised as “BUY what China needs, SELL what they produce”. Sorry to overload from the NYT Mch 17 edition “China Drawing High Tech Research from US”, (www.nytimes.com/2010/03/18/business/global/18research.html?hp), as the graduate engineer says “Of course, China will lead everything”.

The metals are extremely quiet continuing to follow the double D in low volume and tight range. LME stocks saw al cascade into all the locations where it is least likely to be used from around the globe (Europe 40 kt; Asia 20 kt and US 14 kt) taking stocks back to over where they were a month ago but we expect withdrawals to begin again as early as tomorrow. This had no effect on the price as the metal is “dead” stocks and available stock is tight (call it a financial anomaly). The market barely ticked over in the pre markets as traders dollar watched. Barclays Capital said investors put a further US$ 3.98 billion into commodities in Feb taking the total investment US$ 255 billion (Jan US$ 12 billion withdrawn), favouring investments associated to indexes rather than exchange traded products. A port strike in Finland has caused Boliden to shut its Harjavalta cu smelter / refinery after feed stocks ran out, their Kokkola zn / ni feed will last till next week. In Alaska the US EPA has cleared aspects of a permit for Teck Resources to continue operations at their Red Dog zn mine. Another day of little movement.

The Jan Japanese leading index was 96.7 (Dec 97.1) and coincident index 100.1 (99.9). In Europe the Mch UK CBI industrial trend slipped to -37 (-36). Was Feb 05 market turn was the 2010 equivalent of Mch 13, 2009? In the 29 trading days since that sell off hit rock bottom the FTSE is up 9.8% and only fallen on 7 days, DJI has risen 7.3% falling on 9 days and cu jumped 17.5% falling on 13 occasions.

Busy day of US data again starting early at 12:30 with weekly initial jobless claims 457 k (462 k) and the Feb CPI was flat (+0.2%) yoy 2.1% (2.6%), ex food and energy rose 0.1% (-0.1%) yoy 1.3% (1.6%). Later at 14:00 the Mch Philadelphia Fed manufacturing was 18.9 (17.6), as new orders fell and inventories rose. The Feb Conference Board leading indicators rose 0.1% at 107.6, coincident +0.1% at 100.1 and lagging +0.3% at 108. No US data tomorrow.