Commodity Blog

Archive for January 23rd, 2008

AS investors were wiping $110billion off the share market on Tuesday, out in Western Australia’s Pilbara region the red dust was swirling faster than ever as iron ore was blown up, dug up, trucked, railed and shipped at record rates and at a scale unheard of five years ago.
While brokers in city offices were glued to their telephones and trading screens, aghast at the sharp share price falls, Asian power utilities were also on the phone bidding up spot coal prices as the Queensland floods cut production and exacerbated already tight markets for Australian coal.
Welcome to the parallel universes of share trading and mineral digging, where credit and recession fears are driving the share market down, and ongoing real demand from China is driving the country’s mining export boom.
Yesterday, the world’s biggest miner, BHP Billiton, helped remind the skittish market of the scale of the long-term demand for minerals, reporting big increases in production, including a 7.8per cent rise in West Australian iron ore shipments. It follows similarly strong numbers last week from Rio Tinto, which BHP is stalking in a $150 billion takeover play aimed at capitalising on rising commodity demand from China and India.
Owen Hedgarty, boss of $4.5billion Melbourne-based miner Oxiana, yesterday sought to cut through the market panic by saying he had not seen any slowing of Asian demand for his company’s copper, gold and zinc. “The fundamentals remain very strong,” he said after watching from the sidelines as the market shaved as much as $1.7 billion off Oxiana’s capitalisation in just over a week.
While there is nervousness that a US recession and sub-prime contagion could slow Chinese demand, the scale of China’s industrialisation remains the key driver of its mineral buying and appears set to continue to support relatively strong commodity prices.
Mining shares bounced yesterday with BHP up 9.3 per cent and Oxiana rising 12.4 per cent.
“The fear is that China gets caught up in the contagion … I don’t rate that risk highly yet,” Access Economics director Chris Richardson said.
“I think metal demand will remain robust, but with some rising risk in 2009.”
The risk involves inflationary pressures in China. According to Westpac head of economics Bill Evans, China’s domestic economy is driving commodity demand, which is set to be largely unaffected by a US recession. “If Asia slows, it will be the result of internal imbalances, not any external shocks,” he said.
ANZ’s chief commodities strategist Mark Pervan agreed. “This is really a US financial contagion story; this isn’t Chinese domestic development, which is what you focus on when looking at buying BHP or buying copper,” he said.
He noted that commodity prices were relatively stable, with nickel prices up 1.3 per cent this year, and copper up 5 per cent.
While the share falls can be expected to hit consumer spending and business confidence, Mr Evans said the economy was still benefiting from “tail winds” such as a mining-fuelled improvement in the terms of trade.
Australian resources companies have invested heavily in the China boom. According to the Australian Bureau of Agricultural and Resource Economics, in October there was $57.9 billion invested in 91 mineral projects, either under construction or committed to, two-thirds more than a year before.

For several months, emerging markets and commodities have enjoyed spectacular runs. But with emerging-market stocks tumbling, investors are asking whether commodities are next.
Stock-market dives in Asia and Europe were accompanied this week by selloffs in metals and energy markets overseas and in global commodity markets in the U.S. Although commodity prices recovered somewhat after the Federal Reserve’s rate-cut announcement yesterday, oil is more than 10% off its Jan. 3 intraday high of $100.09 a barrel. It closed yesterday at $89.85 a barrel on the New York Mercantile Exchange.
The consumption of oil, copper, steel and other raw materials in a broad Asian infrastructure expansion has been the primary driver of today’s multiyear commodities boom.
Until now, conventional wisdom has been that demand from emerging markets would continue regardless of U.S. economic conditions. Commodities continued to soar even though energy consumption in many Western economies was low to flat for the past couple of years and even after the housing slowdown curbed U.S. consumption of materials such as copper.
This spawned arguments that commodities would stay “stronger for longer” because emerging markets’ prospects had decoupled from U.S. economic problems.
Yesterday’s early-day wobbles are a sign, however, that more traders believe a U.S. recession might spell trouble for regions that had been seen as bottomless pits of commodities demand.
Eric Wittenauer, an energy and industrial-metals analyst at A.G. Edwards, said he doesn’t buy into the view that a U.S. downturn has little effect on Asian demand. “A significant downturn in the U.S. is going to impact the emerging markets as well as more developed foreign economies,” he said.
As stock-market indexes in India, Hong Kong, Japan and China were plummeting yesterday, copper and zinc fell by their maximum 4% daily limit on the Shanghai Futures Exchange. Until Monday, copper had been a big gainer in 2008. Important nickel and zinc benchmarks fell 3.1% on the London Metal Exchange.
Wayne Atwell, president of Pontis Capital Management, a Connecticut natural-resources investment firm, said a falling Chinese stock market is “going to add anxiety to the part of [Chinese] consumers, who might cut back on spending. So you do run the real risk of a slowdown. Undoubtedly, you’re going to shave off some of the demand for commodities.” But he adds that the scope of the impact “is still up in the air.”
Indeed, prices brightened in late U.S. trading. Copper on the Comex division of the New York Mercantile Exchange rebounded from an overnight low of $3.0715 a pound to settle down 1.1% at $3.1890.
While expectations for a short-term dent in the commodities boom are rising, many analysts cite structural, long-term factors such as supply bottlenecks as reasons these markets haven’t yet peaked. Recession fears, some contend, are causing indiscriminate but temporary selling.
“Commodities tend to be an independent market and an uncorrelated asset class, except in times of liquidity crises,” said Jay R. Feuerstein, chief investment officer at 2100 Xenon, a Chicago commodities hedge fund. When markets feel a liquidity crisis, they are all going to go down, said Mr. Feuerstein.
Agriculture markets aren’t attracting as much pessimism, in part because of U.S. mandates that increase the use of crops in alternative fuels and raise competition for food production. Goldman Sachs Group Inc. recently revised its price forecasts upward on various agricultural commodities.
And oil prices, while on a yo-yo, may sink only so far. Philip Verleger, an independent energy economist based in Aspen, Colo., says the credit crunch in the U.S. has meant higher short-term financing costs for companies such as refiners to buy and hold oil in storage.
“One can expect many firms, especially the independent refiners, to cut stocks,” Mr. Verleger wrote this week. Low stocks support prices. “A recession does not necessarily need to be accompanied by an oil price decrease,” he said.
Analysts at the Barclays Capital unit of Barclays PLC said just-released customs data from China are bullish for industrial metals. China, a big commodity producer itself, was a net importer of aluminum in December, and its imports of copper and nickel rose. But given what Barclays Capital calls an uncertain macroeconomic outlook, it added: “We expect prices to remain choppy.”

Gold N.Y. Spot $ 891.30
Silver N.Y. Spot $ 16.13
Lead LME Cash $ 1.1521
Copper LME Cash $ 3.1752
Zinc LME Cash $ 1.0049
Nickel LME Spot $ 12.13
Aluminum LME Spot $ 1.0750
Platinum N.Y. Spot $ 1555.50
Palladium N.Y Spot $ 366.50
Oil WTI Cushing $ 88.20
Natural Gas (Henry Hub)($/MMBtu) $ 7.97
Mid-Columbia (US$/MWh) $ 90.43
CAD/USD (current) $ 1.0282
AUD/USD $ 1.1559
USD/AUD $ 0.8651
USD/CAD $ 0.9753
CAD/USD $ 1.0253
EUR/USD $ 1.4555
Nasdaq 2256.37
DJI 11866.73
S&P/TSX 12431.16
S&P/TSX Global Mining 100.89
Lead LME Stocks 48,075
Zinc LME Stocks 108,925
Copper LME Stocks 176,175
Nickel LME Stocks 46,398
Copper COMEX Stocks 14,056