Against the Grain

The world seems to have a severe case of geological indigestion as Qinghai province in western China is hit by a 6.9 magnitude earthquake making it 19 so far this year and following on from the big ones Haiti and Chile (in ’01 there were 5 registered earthquakes rising to 33 in ’08). The last big China earthquake was in May ’08 in Sichuan province measured a magnitude of 8.0 and saw significant state aid. The region has cu, sn, coal mines and natural gas.

Very light Select volume in Asia but metal prices were predictably higher as equities rose and US$ fell. Once into London the prices matched the twist and turns of the US$ / € in a tight range. The Katanga Province of the DRC has reimposed a ban on the export of unprocessed mineral concentrates. China’s Jiangxi Copper increased its Q1 production by 24% to 219 kt. The LME stocks dominated by a jump in pb stock flowing into north east US. The BHPBilliton Western Australia Nickel West Leinster underground mine activity could be closed for several weeks after an accident. On the demand front the battery maker Exide will closed two of its three lead acid battery facilities in Penn US in Jne citing a sluggish economy. The strong ni price is sucking in a flow of ni mine restarts China’s Minmetals is looking at restarting the Avebury mine (8.5 ktpa) in Tasmania, Australia. The ILZSG reported the zn market in a surplus of 107 kt in the year to Feb and pb a 10 kt surplus.

Recently al has been the best performer as is sucks in technicians and those who link it to the oil price. This link comes from its reliance on energy in its processing, quite often it is referred to as “solid electricity”, yet very little of the generation comes from oil the industry is sited around cheaper “stranded power” hydro, natural gas and coal. In some cases this has changed especially the coal reliant plants in South Africa, US and Australia. A new feature could be an “ETF moment”, talk of proposed ETF vehicles have provided significant buying enthusiasm to new precious metal instruments. The idea of physical base metal ETF products have been around for over four years but the logistics is complicated.

Singapore revalued its currency after Q1 growth rose 32% (Q4 -2.8%). In Australia the Apr Westpac consumer confidence index was 116.1 (Mch 117.3). The Feb Euroland industrial production rose by a better than expected 0.9% (+1.6%) yoy 4.1% (1%). Thurs sees the monthly flow of Chinese data with Q1 growth expected at over 11%.

Overnight the weekly ABC consumer sentiment survey suffered a setback slipping to -47 from -43. The weekly MBA mortgage applications fell 9.6% (-11%). The Apr Bloomberg global investor confidence leapt to 67.57 (53.78). At 13:30 the Mch retail sales up 1.6% (+0.5%), ex auto +0.6% (+0.5%) as the CPI up 0.1% (flat), yoy 2.3% (2.1%), ex food and energy flat (+0.1%), yoy 1.1% (+1.3%). Then Feb business inventories rose 0.5% (+0.2%). The DJI rose as JP Morgan announced strong Q1 earnings as investment bank bond trading helped by low interest rates trumped retail banking and credit card losses. Despite better equities and weaker US$ most metals had a quiet day the exception of ni.

We have an almost deafening crescendo of analysis and comment regarding China revaluing the Renminbi and we are not sure the authorities there will move while the hounds are singing. At a meeting between Presidents Obama and Hu, the latter made it clear their currency policy would be based on their own needs. See Yan Yao article “Renminbi adjustment will not cure trade imbalance”, FT 12/04 (www.ft.com). Another EU Greek rescue package boosted the € y/day but one cannot help getting the feeling that we are in a similar game plan to most financial hiccups. The problem arises and technocrats begin with denial then move through the stages of doing the least to solve the issue. We suspect give it a week to ten days Greece and the others PIIGS will be jangling the financial and political nerves again.

Following the EU move metal prices opened strongly then flagged why? In Asia prices continued to slip led by gold in reasonable volumes. When London began the focus was immediately on the currency with the metals following every move. Routine LME stocks with al and ni leading the outflows. If our source is correct China, the world’s largest gold producer, increased its official holdings by a record level in ’09, the PBoC by law buys all the gold produced in the country and last year that was a record 314 tonnes. Since the beginning of Apr the zn / pb spread has narrowed to US$ 50 from over US$ 200 with pb posting a strong recovery. The pre market took on the mood of the balmy spring days we are having with suspect traders hoping the US will kick up a storm.

Y/day China posted its first trade deficit since ’04 of US$ 7.2 billion with imports rising 66% as commodity prices pushed higher. While today further evidence of bank lending being regained in as with much new loans at Rmb 510 billion (Feb Rmb 700 billion). The Mch Australian business confidence slipped to 16 (19) and the conditions improved to 13 (8). In Europe it was a busy day of Mch consumer prices, the German CPI rose 0.5% (Feb 0.5%), yoy 1.1% (1.1%). In the bond market the great and the good in the US Goldman’s, Pimco and Blackrock are looking for US inflation to remain benign, below 1%.

In the US the Feb trade deficit was US$ 39.7 billion (Jan US$ 37.3), imports rose 1.7% and exports crept up 0.2%. The US corporate quarterly earnings season began with the Alcoa report below expectations. One comment said management was less concerned about the surplus of al and more concerned about potential cancellations of aircrafts impacting on demand. This we believe highlights the advantage producers have in the metal production chain. They can hide excess supply by production cut backs, LME / non LME warehouse financing deals and now as RUSAL unveiled y/day setting up other vehicles such as an EFT. While demand downturn is something they cannot control and visible. The playing field is clearly in the tipping towards producer, as in iron ore – for the moment. Late in the afternoon metals shrugged off strong US$, weaker gold and oil choosing to follow the equities and running to the sessions high as short got caught out.

An interesting morning mind game is to hear on the radio where the DJI closed and what level the Nikkei and US$ are trading at then take a stab at what level cu and the FTSE will be at when you get to the office. You will be amazed how easy it is (much harder to make the decision the night before), this morning the DJI had closed up 30 points  and US$ was weaker, so guess was cu US$ 50 higher and FTSE up 50 points, too easy – right on. Try it. Two stories should keep the metals bid today, as both are likely to occur on a weekend, a revaluation of the Chinese currency (seen by the market as bullish for commodities) and a Greek bailout (bullish for the € et al), both are likely to hang around till they happen.

Another dull Asian session with the lightest Select volume in a while, there is little economic data so the day will be dominated by the US$ and equities. In London higher equities and weaker US$ saw the metals push higher and see the flagship cu close at a new 2010 weekly high. The weekly Shanghai stocks continue to rise, cu by 15,949 tonnes to 169,538; al 2,148 tonnes to 413,008 and zn 4,148 tonnes at 248,440 the other commodity, rubber declined 4,376 tonnes to 58,781 as production is affected by drought and ahead of the new tapping. Then more routine LME stock which saw cu down 525 tonnes on the week; al off 13 kt; zn rose 4.5 kt; pb off 2 kt; ni down 2382 tonnes and sn rose 20 tonnes. In China Xiangguang Copper is looking to boost smelting and refining capacity to 600 kt from 200 kt by mid ’11. The subdued trading continued through the pre market. The afternoon saw al up and away to an two year high boosted recently by rising input costs and fund buying.

The Mch Australian construction index dipped to 48.7 (Feb 52.8), that is a slip into business contraction. The Feb German trade balance rose to € 12.6 billion (€ 8.0 billion) with exports rising 5.1% (-6.5%) and imports +0.2% (-5.6%). In France Feb industrial production was flat (Jan +1.1%) yoy +3.3% (2.6%) and manufacturing output rose 0.4% (+0.6%) yoy +4.6% (3.6%). The UK posted some worrying Mch producer price data, input PPI rose 3.6% (Feb +0.6%) yoy +10.1% (7.5%) and output PPI up 0.9% (+0.3%) yoy 5% (4.2%) reflecting the significant fall in £ (petrol prices recently hit a record). Construction officially began of the Nord Stream gas pipeline linking Germany with Russia under the Baltic Sea (Gasprom 51%, BASF and E.ON Ruhrgas 20% each and Gasunie 9%). Russia supplies Europe with 30% of its gas and when completed in 2012 the line will bypass existing transit countries such as Ukraine, Belarus and Moldavia. We spoke to someone involved in another European pipeline and they indicated a 22mm tick walled 56 inch pipe consumes one tonne of steel / 12 metres.

The Mch Canadian employment rose 17.9 k (Feb 20.9 k) with unemployment steady at 8.2%.At 15:00 the US Feb wholesale inventories rose 0.6% more than expected (Jan -0.1%). Then it was back to watching the US$ and equities.

Over the week cu +45, al +48, zn +9, pb +127, ni +200, gold jumped US$ 36 / oz, oil unchanged, DJI at time of writing +49 points, US 10 year bond yields rose 0.05%, US$ / € up 0.9 and Shanghai equities rose 31 points.

The confidence of investors was tested in Asia as Feb US consumer credit flopped and Japanese data disappointed. For some time we have felt the recent metal price rise has had little to do with economic growth and a lot to do with low interest rates (with any move up being in slow,  cautious, and small steps). The general outlook is better but not brilliant hence investors want to be in liquid short term assets that compensate for low returns on cash; equities and commodities and take advantage of currency carries. No one wants to invest in longer term productive assets and until that happens short term assets will remain overpriced. Take cu in 2008 world growth was a synchronised 4.5% driving its price to US$ 9000, now with world growth patchy and sub 2.5% the price is US$ 8000, that does not make fundamental sense.

The metals slipped up in Asia as investors continued to liquidate recent gains however the Select volumes were extremely light, cu traded less than 1000 lots. In London prices struggled to hold as the US$ strengthened to € 1.33 and weaker US equities closes flowed through Asia into Europe. The LME stocks were routine. In their review of 2009 the independent metals analyst GFMS said global mined output rose 2.4% to 15.8 million tonnes, refined production increased 0.9% to 18.4 million tonnes and demand declined 1.7% to 17.6 million tonnes (the ICSG saw refined output at 18.35 mt and demand at 17.99 mt). At CESCO Freeport said “We are facing a world where China is very strong and has created a copper price that would justify all of our capital expenditure, but two-thirds of the world’s copper markets — the U.S., Europe and Japan — remain weak and so, when you have the price supported solely by China, we are just not real comfortable in going all out right now”.

The Japanese Feb machine orders fell 5.4% against an expected rise (Jan -3.7%), yoy -7.1% (-1.1%). Looking forward the Mch Eco Watchers survey rose to 47.4 (42.1) with the outlook at 47.0 (44.8). The Mch Australian employment grew 19.6 k as expected (Jan +0.4 k) with unemployment steady at 5.3%. The Feb UK industrial production rose 1% (-0.5%) yoy -0.1% (-1.6%) as manufacturing output rose 1.3% (-1%), yoy +1.4% (+0.1%). The Mch new car registrations were up 26.6% yoy (+26.4%) and Halifax house prices +1.1% mom (-1.5%). The Feb Euroland retail sales disappointing again -0.6% (-0.2%) yoy -1.1% (-0.6%) and Feb German industrial production was unchanged (revised to 0.1% from 0.6%), yoy +5.8% (2.4%). Finally both BoE and ECB left rates unchanged 0.5% and 1% respectively.

Overnight the Feb consumer credit tumbled US$ 11.5 billion well away from what was expected (Jan +US$ 10.6) and questioning again the health of final demand, over 70% of the US GDP. The closely watched weekly initial jobless claims rose 18 k to 460 k (442 k), that’s the data for the day. The US Treasury Sec met in closed session with the Chinese with no immediate tangible results. Another part of the world to watch is central Asia were the President of Kyrgyzstan was overthrown after protests about increased energy prices. This economically poor country is in the centre of the new “Great Game” with implications for Afghanistan and energy. So back to the US$ and DJI that turned the metals around as the former weakened and latter strengthened from mid afternoon.

Markets remained quiet overnight with talk again of further Chinese rate hikes as word spread that the PBoC is to sell three year bills Thurs. An official at the Foreign Exchange Trade System said China is considering allowing their currency to trade against the Russian ruble, S Korean won and Malaysian ringgit to promote cross border trade. Earlier this week the US Treasury Sec deferred the impending April 15 currency “manipulation” report to Congress on the Renminbi. This was to smooth the way for the Chinese to attend the US nuclear security summit next week. Now Thurs the Treasury Sec will stop over in Beijing on his way home from India.

The LME Select turnover was light and ranges tight with cu arriving back in London unchanged. The LME stocks had little to them except another out of sequence al rise. From Apr 1 the LME warehouses banged on another annual rent rise averaging about US$ 2 cents / tonne for all metals, all location though the FCA charges are little moved. This said we are hearing some warehouses will offer investors as little as one month deals below this official rent rate. From what we can gather the physical market remains quieter than usual for this time of year, the LME warrants are getting over rent settlement. In the premarket everything struggled to go anywhere. At CESCO the Chilean Copper Commission has raised its average ’10 cu price outlook to US$ 7275.

Mon saw the Mch US non manufacturing PMI rise to 55.4 (Feb 53.0) and others followed today with Mch service PMI Australia 48.4 (48.3), Italy 55.3 (50.8), France 53.8 (53.0), Germany 54.9 (54.7), Euroland 54.1 (53.7) and UK 56.5 (58.4). The Euroland composite PMI was 55.9 (55.5). The BoJ left rates unchanged at 0.1%, like the US no inflationary pressure. The Euroland final Q1 GDP was revised to 0% from previous +0.1%, yoy -2.2% (-2.1%). The German Feb factory orders were flat after a strong 5.1% in Jan, yoy +24.5% (+20.6%). A strong move in gold as sirens warn again about Greece.

The Fed FOMC minutes of the Mch 16 meeting disclosed policy makers seeing inflation slowing in the coming months allowing them to leave rate low and concentrate on unemployment. Overnight the US weekly ABC consumer sentiment survey improved to -43 (-45). The weekly MBA mortgage applications fell 11% (1.3%) no surprise with bond yields higher. No US data today instead there is a number of Fed governors led by Bernanke speaking. In Canada the Mch Ivey PMI was a strong 57.8 (51.9). By now the markets had slipped into double D (US$ / DJI) mode.

Fri saw US nonfarm payrolls jump 162 k (48 k were part time government jobs) as unemployment remained at 9.7%. This reinforced the existing view that Western central banks will keep interest rates low into the foreseeable future combined with an expectation that a broad recovery is gathering momentum. Therefore investors have a ready supply of cheap cash to chase short term opportunities. The growth side was confirmed by the Australian Reserve Bank raising rates by 0.25% to 4.25%. If the authorities do believe the recovery is getting entrenched then expect rates to feel their way higher, US 10 year Treasury bonds have moved higher to around 4%.

With the LME out, there was no surprise to see the metals open higher after the US jobs data spurring on fund buying. Nothing much in the LME stocks with a rise in zn the feature (mostly into US). In looking for metal news it is amazing how China centric things are, with very little about business activities / levels in Europe or the US, is this because the newswires are only capable of putting China in the lead line or is business still slow in these areas. After a early break of cu at 8000, things slipped into a “holiday mode”. On the fundamental side cu should be to the fore with CESCO Week in Santiago, today is the exploration forum followed tomorrow and Thurs by the CRU Copper Conference. Cu took a late trim pulling it back below 8000.

The Feb Japanese leading index improved to 97.9 (96.9) and coincident index 100.7 (100.3). In Germany Mch new car registrations fell 30% yoy (Mch ’09 +40%), as last years the car purchase incentive scheme data is smoothed. In the Euroland the Apr Sentix investor confidence jumped into positive ground 2.5 (-7.5). The UK Mch construction PMI moved into expansion 53.1 (48.5). In the UK an election has been called for May 6 so we will be turning off TV, radio and shunning British newspapers! The spread between German and Greek 10 year bonds moved over 400 points as worries about the recent EU / IMF contingency plan arose.

The US has not data today as it absorbs the employment data. In this environment the markets stumbled into the 14:30 DJI opening hoping for a directional fix. Employment data can be confusing following Fri strong nonfarm payroll data the US Labour Department reported today US employers had fewer job openings and hired fewer workers in Feb that Jan as total separations also declined.

The markets will be dominated by the Mch manufacturing PMI data with China setting the pace early the official index rose to 55.1 (Feb 52.0) and the HSBC medium / small business index 57.0 (55.8). Elsewhere, Australia 50.2 (53.8), Russia 50.2 (unchanged), India 57.8 (58.5) then into Europe, Italy 53.7 (51.6), France 56.5 (56.3), Germany 60.2 (59.6), Euroland 56.6 (56.3) and UK 57.2 (56.5). However the real focus is on the US and it was a strong 59.6 (56.5).

In Asia Select volumes were lighter than of late with buyers in command, ignoring the stronger US$ as start of the month buyers came in gain support from generally better figures above. The LME stock movers were routine and ignored, over the week cu declined 4.5 kt; al rose 15 kt; zn off 225 tonnes; pb up 4 kt; ni up 2 kt and sn slipped 115 tonnes. Y/day we showed the Q1 stock moves of the LME (cu stocks have risen 2.4%; al dipped 0.6%; zn rose 11%; pb jumped 20%; ni off 1% and sn down 9%) admittedly from a lower base the Shanghai weekly stocks have seen cu rise 63%, al 36% and zn 42%. As anticipated in the market the alumina refinery Windalco in Jamacia owned by UCRusal closed their final operations permanently, at its peak it produced 1.2 mtpa, low prices were cited. The World Steel Association (representing 85% of steel production) has called for competition authorities to examine the iron ore market after the recent changes imposed by producers with 75% of the market dominated by three firms. The prices are rising in the pre market on light volumes as the US$ strengthens, as we said Q1 US$/€ strengthened by 5% and so did cu, another correlation fizzles out?

In other data the Japanese Q1 Tankan saw the large manufacturers outlook improve to -8 (-18) and non manufacturing outlook at -10 (-19). More evidence that final demand is lacking traction the German Feb retail sales fell 0.4% (Jan -0.5%) yoy -9.9% (-4%).

The US Mch Challenger job cuts fell 55% yoy (Feb -77.4% yoy) this was followed by initial jobless claims 439 k (445 k). The Feb construction spending fell 1.3% (-0.6%).

Everyone have a good Easter and we offer our usual health warning about these markets, it appears while government is open in the US Fri markets are not so you get employment data with nowhere to go. Then Mon the US comes back with the LME closed. Over the shortened week cu rose 380, al +126, zn +160, pb +83 and ni jumped 1400. In Q1 the widely followed CRB commodity index was down 3.5% with rises by ni (+33%) and palladium offset by falls in sugar (-34%), natural gas, wheat, corn and pb. The Baltic Dry Index lost 4.5% while natural rubber touched a 58 year high US$ 3.50 / kilo.