Commodity Blog

Archive for January, 2008

Gold N.Y. Spot $ 912.30
Silver N.Y. Spot $ 16.34
Lead LME Cash $ 1.2020
Copper LME Cash $ 3.2292
Zinc LME Cash $ 1.0165
Nickel LME Spot $ 12.25
Aluminum LME Spot $ 1.1258
Platinum N.Y. Spot $ 1688.00
Palladium N.Y Spot $ 381.50
Oil WTI Cushing $ 90.90
Natural Gas (Henry Hub)($/MMBtu) $ 7.84
Mid-Columbia (US$/MWh) $ 90.94
CAD/USD (current) $ 1.0060
AUD/USD $ 1.1334
USD/AUD $ 0.8823
USD/CAD $ 0.9929
CAD/USD $ 1.0072
EUR/USD $ 1.4696
Nasdaq 2360.21
DJI 12370.32
S&P/TSX 13007.62
S&P/TSX Global Mining 104.25
Lead LME Stocks 47,800
Zinc LME Stocks 109,900
Copper LME Stocks 172,775
Nickel LME Stocks 46,656
Copper COMEX Stocks 14,036

Current credit market woes could further stunt commodities supply growth especially from small producers seeking to develop high-cost projects in ”risky” regions like the Democratic Republic of Congo and Zambia, says Lehman Brothers in its 2008 commodities outlook.
Lehman notes that lack of available supply has already limited global consumption of particularly copper, nickel and iron-ore.
It puts this down to a long list of non- cyclical factors, including depletion of high- quality resources in low-risk regions.
The study warns that inventories can get worked down to ”very” low levels when underlying demand is greater than production.
It points out that London Metals Exchange nickel inventories fell to five hours of supply in 2007, and copper and zinc inventories to very low levels as well.
With low inventories and insufficient supply growth to meet underlying demand, commodity prices can soar to levels far above the marginal cost of production, the report says.
Lehman says that recent data suggest that the long-awaited economic slowdown is upon the world, but with the probability of a recession in 2008 is still below 50%.
It believes that the recessionary impact on the mining sector could be muted if demand for metals and bulk commodities in emerging eco- nomies continues to be strong.
If decoupling proves to be a reality, it believes that the mining sector outlook for 2008 should once again be good, with mining equity valuations inexpensive.
Lehman’s global economics team does not completely buy the decoupling thesis, however, and is therefore forecasting a modest slowdown in Chinese economic growth from 11,3% in 2007 to 9,8% in 2008, and 8,8% in 2009.
Lehman expects mining costs to rise by at least 5% on average in 2008 as a result of persistent supply-side constraints.

Copper
Lehman finds that the lead time to bring new copper supply on line has significantly lengthened.
In general, it expects supply constraints to continue to be a major factor in the copper market.
It puts China’s copper consumption at 26% of global consumption and US consumption at less than 12% of global copper consumption.
It says copper inventories in China are low, with the London Metals Exchange-Shanghai price differential slightly favouring Chinese imports, owing, in part, to the Chinese government waiving a 2% duty on copper imports.
One significant negative in the copper market in 2008 should be the shift in production at the Grasberg mine in Indonesia from the low-grade walls in the pit to the high-grade bottom of the pit, which should result in a 2,4% increase in global copper supply in the third quarter, an increase of 202 000 t. This shift is the primary reason why Lehman sees the copper market softening modestly in 2008. Its 2008 copper price forecast is $3/lb.

Nickel
Lehman expects stainless steel inventory destocking to come to an end this year and nickel demand to rebound. On the supply side, it says the emergence of nickel pig iron in China, in 2007, has significantly changed the nickel industry and esti- mates that nickel pig iron pro- duction costs of $9/lb and $15/lb support nickel prices of at least $11/lb. Its 2008 nickel price forecast is $13/lb, versus a current price of $13,25/lb, with the average at $10/lb-plus until “at least” 2010.

Zinc
It sees zinc moving into surplus in 2008. Zinc production has increased at Antamina, in Peru; Lennard Shelf, in Australia; San Cristobal, in Bolivia; Cerro Lindo, in Peru; and from mines in Kazakhstan. Chinese refined zinc production increased 19% year-on-year and Lehman expects Chinese refined zinc exports to increase in 2008 as China still has excess zinc smelting capacity. As the zinc market heads into surplus and 2008 inventories build, there is the risk that zinc prices will drift down to Lehman’s estimated marginal cost of production of $0,90/lb.

Aluminium
Lehman describes aluminium as this cycle’s base-metal laggard. Despite global aluminium demand increasing by 9%-plus from 2006 to 2007, its price has been range-bound between $1,06/lb and $1,33/lb. Lehman cites the reason as the abundance of bauxite resources in low-risk Australia, bauxite mining’s technically unchallenging nature and the quick coming on line of new alumina refining and aluminium smelting capacity.
It notes that most of the world’s aluminium producers are racing to get to the bottom of the cost curve by building new smelting capa-city in the Middle East and Iceland, where there are large volumes of cheap, stranded energy. Chinese production increased by 35% year-on-year and Chinese aluminium smelters are the marginal producers. Lehman says that if prices go far above $1,30/lb, a supply-side response could drive them down. Its below-consensus aluminium price forecast for 2008 is $1,10/lb.

Iron-ore
Lehman says that the seaborne iron-ore market is benefiting from a combination of very strong demand growth in China, and a slowdown in supply growth from India and domestic Chinese mines. Iron-ore exports from Brazil and Australia have also failed to meet expectations owing to weather- related problems and infrastructure constraints, especially at Brazilian ports. After peaking at almost 68-million tons in June 2007, Chinese monthly iron-ore production has been stable at between 60-million and 65-million tons a month.
Chinese iron-ore imports from January to November increased 17% year-on-year and October and November imports by 29% year-on-year. The marginal cost of production of iron-ore has been increasing as higher quality Chinese iron-ore resources are depleted and an increasing portion of Chinese mine supply of iron-ore is coming from small, low-grade, underground mines.
This high-cost, nontraditional supply has been necessary to meet underlying demand. Lehman estimates the marginal cost of production is currently at least $85/t and rising. With the iron-ore market as tight as it is, the spot price for Indian iron-ore in China has surpassed $200/t for iron-ore fines with 63,5% iron content.
This record-high price compares with a delivered $85/t cost for Australian iron-ore bought under contract, assuming a spot freight rate of $35/t and a delivered cost for Brazilian ore of $135/t, assuming the spot freight rate of $85/t. The iron-ore spot price has increased by 150% since the beginning of 2007.
Lehman is forecasting a 50% increase in the benchmark iron-ore contract price for the calendar year beginning April 1, 2008.
The consensus forecast is for a 35% price increase. Based on its analysis, it believes the risk to its above-consensus price forecast is to the upside. The iron-ore market could be primed for a surprisingly high contract price increase in 2008.
Higher-than-expected iron-ore prices should be a positive for Rio Tinto and may put added pressure on BHP Billiton to either make a formal offer for Rio greater than its proposed three-for-one share exchange offer, or walk away from this potential merger altogether.

Thermal coal
The Asia-Pacific thermal coal market has strength- ened because of steady demand growth and a variety of supply problems. Lehman expects this market to remain “very tight” in 2008 and believes the risk to its own 2008 Australian thermal coal contract price forecast of $68/t is “significantly” to the upside.
Lehman would not be surprised if coal prices settle at $80/t. It says that many of the long list of supply problems affecting the seaborne thermal coal market in 2007 have not been solved, and other problems have emerged. In Australia, ongoing port capacity constraints continue to affect exports.
While the vessel queue at Newcastle has fallen to 30 ships from more than 50 ships, Lehman does not expect to see a signifi- cant increase in Australian thermal coal exports in the near term.
The spot price for Newcastle thermal coal is currently $91/t versus just $51/t a year ago. A very strong Atlantic coal market is supporting Asia-Pacific thermal coal prices.
Lower than expected supply from South Africa and Russia has affected the Atlantic market. It notes that inventories at South Africa’s Richards Bay Coal Terminal have fallen to 1,1-mil- lion tons owing to a five-day closure of the Richards Bay coal rail line and a series of logistical problems compared with a normal level of Richards Bay Coal Terminal (RBCT) invent-ories of three-million tons.
RBCT exported only 66-million tons of coal in 2007, well below its capacity of 72-million tons. Lehman does not expect the expansion of the coal terminal to 76-million tons a year in 2008 to affect supply as the bottleneck has not been at the port. RBCT is set to expand to 91-million tons capacity in 2009.
Russian coal exports to Europe have been less than expected owing to strong domestic demand as well as stronger than expected demand in Japan and Korea. As a result of this tightness in the Atlantic thermal coal market, the spot price of Richards Bay thermal coal is currently $101/t versus just $49/t a year ago.
Lehman expects bottlenecks in the seaborne coal market eventually to ease, but for it to remain very tight for ”at least the next two years”, owing to slow supply growth and strong demand growth from India, whose imports could increase by 25-million tons in 2008, and, possibly, China.
Coking coal Like the Asia-Pacific thermal coal market, the seaborne coking coal market has been affected by port capacity constraints. The coking coal market has also been affected by production shortfalls in China as many Chinese coking coal mines are small, illegal mines that the government is forcing to close.
Coking coal demand has been very strong as global steel production increased 6,3% from 2006 to 2007. Coking coal prices in the spot market have been as high as $200/t. Lehman believes the risk to its own $120/t hard Australian coking coal contract price forecast for the fiscal year beginning April 1, 2008, is significantly to the upside.
If the market continues to tighten, it would not be surprised if contracts are ultimately settled at closer to $150/t.

Platinum
Lehman sees platinum-group metals (PGMs), especially platinum and rhodium, having a ”very good” 2008 outlook. It expects Lonmin and Anglo Platinum to continue to have operating problems and foresees PGM mining costs in South Africa continuing to be pushed higher.
It expects PGMs to be less cyclical than base metals since PGM demand growth is as much a function of tightening environmental regulations as it is a function of global economic growth.
It sees the risk to its own $1 300/oz platinum price forecast and $6 000/oz rhodium price forecast for 2008 as being to the upside, against the current $1 552/oz platinum price and $7025/oz rhodium price. It sees palladium fundamentals as being far weaker, with the palladium market having been in surplus since 2001.
It is comfortable with its 2008 palladium price forecast of $350/oz, with palladium currently at $377/oz.

Gold N.Y. Spot $ 905.50
Silver N.Y. Spot $ 16.22
Lead LME Cash $ 1.1698
Copper LME Cash $ 3.2165
Zinc LME Cash $ 1.0138
Nickel LME Spot $ 12.18
Aluminum LME Spot $ 1.0932
Platinum N.Y. Spot $ 1590.00
Palladium N.Y Spot $ 370.50
Oil WTI Cushing $ 87.60
Natural Gas (Henry Hub)($/MMBtu) $ 7.86
Mid-Columbia (US$/MWh) $ 93.91
CAD/USD (current) $ 1.0104
AUD/USD $ 1.1409
USD/AUD $ 0.8765
USD/CAD $ 0.9722
CAD/USD $ 1.0286
EUR/USD $ 1.4713
Nasdaq 2338.92
DJI 12296.26
S&P/TSX 12892.88
S&P/TSX Global Mining 104.16
Lead LME Stocks 47,900
Zinc LME Stocks 109,700
Copper LME Stocks 174,300
Nickel LME Stocks 46,590
Copper COMEX Stocks 14,056

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

Gold N.Y. Spot $ 889.85
Silver N.Y. Spot $ 16.03
Lead LME Cash $ 1.1240
Copper LME Cash $ 3.1344
Zinc LME Cash $ 0.9886
Nickel LME Spot $ 12.02
Aluminum LME Spot $ 1.0698
Platinum N.Y. Spot $ 1553.00
Palladium N.Y Spot $ 365.50
Oil WTI Cushing $ 89.70
Natural Gas (Henry Hub)($/MMBtu)* $ 8.41
Mid-Columbia (US$/MWh)* $ 86.03
CAD/USD (current) $ 1.0247
AUD/USD $ 1.1501
USD/AUD $ 0.8695
USD/CAD $ 0.9686
CAD/USD $ 1.0324
EUR/USD $ 1.4624
Nasdaq 2296.98
DJI 11952.33
S&P/TSX 12462.47
S&P/TSX Global Mining 100.08
Lead LME Stocks 48,100
Zinc LME Stocks 105,000
Copper LME Stocks 178,850
Nickel LME Stocks 46,344
Copper COMEX Stocks* 14,056

This is a 2-year Nickel price graph from January 23, 2006 till January 22, 2008:

Polypropylene and Linear Low Density Polyethylene contracts.

Gold N.Y. Spot $ 867.30
Silver N.Y. Spot $ 15.61
Lead LME Cash $ 1.1399
Copper LME Cash $ 3.1298
Zinc LME Cash $ 1.0251
Nickel LME Spot $ 12.39
Aluminum LME Spot $ 1.0755
Platinum N.Y. Spot $ 1547.00
Palladium N.Y Spot $ 365.50
Oil WTI Cushing $ 89.70
Natural Gas (Henry Hub)($/MMBtu) $ 8.41
Mid-Columbia (US$/MWh) $ 86.03
CAD/USD (current) $ 1.0324
AUD/USD $ 1.1597
USD/AUD $ 0.8623
USD/CAD $ 0.9713
CAD/USD $ 1.0295
EUR/USD $ 1.4468
Nasdaq 2340.02
DJI 12099.30
S&P/TSX 12211.80
S&P/TSX Global Mining 101.52
Lead LME Stocks 47,925
Zinc LME Stocks 105,500
Copper LME Stocks 180,900
Nickel LME Stocks 46,176
Copper COMEX Stocks 14,056