Commodity Blog

Archive for November, 2008

Commodity prices are falling at their fastest pace in decades, cutting a swath through the economy as tumbling crude puts Alberta oilsands projects on ice and crashing base metal prices shutter mines across the country.

Scotiabank reported Thursday its monthly commodity price index fell 16.6 per cent in October, the sharpest monthly decline since the index was created in 1972. The oil and gas sub-index led the plunge, off 21.8 per cent.

Those declines took their latest victim Thursday, with the announcement by Royal Dutch Shell of its second oilsands project delay in as many months. Oil prices tumbled from an average $103 US a barrel in September to $76.72 US in October, and is now trading around $54 US.
Similar cutbacks, such as Petro-Canada’s mid-November delay of its $21-billion Fort Hills project, will slash oilsands investment in 2009 by 20 per cent to $16 billion from $20 billion, according to the Canadian Association of Petroleum Producers.

Scotiabank’s metals and minerals index was equally dire. It plunged 15.9 per cent in one month driven by nickel and zinc prices now only matching average global costs of production, making mining a break-even prospect at best for many producers.

That has led mining companies around the world to sharply reduce operations. Reuters news service listed 63 announcements in November alone of mining companies, many of them global players, cutting back operations. In October, 56 such announcements were made — following six in September — reflecting the increasing decline in metals prices over that period.

“There has been a dramatic decline in base metals prices,” said the author’s report and Scotiabank commodity specialist Patricia Mohr. Nickel is now trading around $4.63 a pound from almost $24 only months ago, and copper is at about $1.56 US a pound, down about 44 per cent so far this year.

“When you approach average world cash costs it means that part of the industry isn’t covering cash and. .. higher cost producers are actually shutting down capacity. For example, there have been four small nickel mines in Ontario that have shut down because prices aren’t high enough,” Mohr said.

The story is being across Canada in places like New Brunswick, where zinc-lead operator Blue Note Mining announced in late October it was putting its mines on ice, and in Saskatchewan, after Denison Mines said Tuesday it was delaying a uranium project in the northern part of the province.

The industry that employs 360,000 people and contributes $42 billion, or 3.5 per cent, of the country’s gross domestic product, according to data compiled by Paul Stothart, vice-president of economic affairs for the Mining Association of Canada.

He estimates half a dozen “global-scale” mines are closing in this country, “although this is simply an estimate and it may change in the future.”

Mohr feels oil prices have bottomed and are set to rebound strongly “early next decade.” But she said metals prices will at best remain or fall below current levels for the next 18 months and not begin to rebound before 2011, despite China’s dramatic 108-basis-point cut in lending rates this week that helped give a lift to base metals prices.

Canadian investors reacted strongly though to China’s announcement, with stock in mining giant Teck gaining about 44 per cent in the past two days of trading and base metal prices rising strongly.

Mohr is more optimistic about uranium, which should get a lift by Indian buying next year. Spot prices fell from $60.40 US a pound in September to $46 in October.

She’s also upbeat about potash, which remains at historically high prices with Japan recently signing purchase agreements $200 US higher than the current contract prices of about $700 US.

Gold N.Y. Spot $ 808.80
Silver N.Y. Spot $ 10.07
Lead LME Cash $ 0.5375
Copper LME Cash $ 1.6171
Zinc LME Cash $ 0.5489
Nickel LME Spot $ 4.58
Aluminum LME Spot $ 0.7931
Platinum N.Y. Spot $ 0866.50
Palladium N.Y Spot $ 199.00
Oil WTI Cushing $ 052.00
Natural Gas (Henry Hub)($/MMBtu) $06.84

USD-AUD $ 1.5501
AUD-USD $ 0.6451
CAD-USD $ 0.8163
USD-CAD $ 1.2250
EUR-USD $ 1.2985

Gold N.Y. Spot $ 782.45
Silver N.Y. Spot $ 9.42
Lead LME Cash $ 0.5516
Copper LME Cash $ 1.5740
Zinc LME Cash $ 0.5461
Nickel LME Spot $ 4.58
Aluminum LME Spot $ 0.7933
Platinum N.Y. Spot $ 0821.00
Palladium N.Y Spot $ 183.50
Oil WTI Cushing $ 049.50
Natural Gas (Henry Hub)($/MMBtu) $06.75

USD-AUD $ 1.6124
AUD-USD $ 0.6202
CAD-USD $ 0.7779
USD-CAD $ 1.2855
EUR-USD $ 1.2465

Steelmakers are suspending and renegotiating contracts with their raw-material suppliers as they grapple with the sudden drop in demand for everything from cars and appliances to bridges and buildings.

Some customers want suppliers to cancel or postpone deliveries. Others are simply refusing deliveries and buying their coal, iron ore and scrap steel on the spot market, where prices have fallen below long-term-contract prices.

The unilateral moves put suppliers in a squeeze. If they don’t agree to delay shipments or lower prices, they could be left with no sales at all. At Chinese ports, ships laden with unwanted scrap metal sit stranded while scrap sellers scramble to find new buyers. The alternative, sending the unwanted scrap back to the U.S, is cost-prohibitive.

ArcelorMittal sent a letter to its German scrap-metal suppliers, who essentially are beholden to the world’s biggest producer of steel, saying the steelmaker has been forced by the global downturn to suspend contracts with the suppliers as of the end of last month. ArcelorMittal didn’t confirm the existence of the letter, which was reviewed by The Wall Street Journal, but said it “has taken voluntary, prudent and responsible steps to align supply with demand.. .. We announced on 5 November we have suspended some raw-material deliveries.”

Likewise, India’s state owned Rashtriya Ispat Nigam Ltd. wrote to several of its metallurgical-coal suppliers this month, asking them to cut prices 68% for the contract year ending next June. The steelmaker said it hadn’t received a response as of late last week.

The U.S.-based Institute of Scrap Recycling Industries, which represents 16,000 companies in the U.S. and abroad that collect and resell metals, paper and plastics, met this month with the U.S. Commerce Department to discuss how Washington could protect and enforce contracts. The Institute’s main complaint involved Chinese scrap buyers who are canceling orders and insisting on renegotiating prices at ports after deliveries arrived. Institute President Robin Wiener estimated that busted contracts with Chinese buyers are costing his members “hundreds of millions of dollars.”
Generally, it is easier — and less expensive — to renegotiate contracts instead of going through the courts to enforce them, which can take years.

Buyers of scrap steel and other raw materials such as iron ore and coal need less of those products because demand for autos, appliances and buildings has decreased sharply. As demand has fallen, so have spot prices, which are frequently less than contract terms. Iron ore, for example, currently sells for about $70 a metric ton on the spot market. The contract price is about $90 a metric ton. That looked like a good deal when the contract was negotiated earlier this year and strong demand put the spot price at about $180 a metric ton. Scrap prices vary according to the metal and the quality. But many contracts for scrap steel were formed when spot prices were triple what they are now.

That means as steelmakers look to cut costs in the face of plunging demand, they prefer to buy ingredients on the spot market. But doing so involves getting out of long-term contracts.
Rather than have some customers walk away from contracts, the world’s biggest provider of iron ore, Cia. Vale do Rio Doce, said it is trying to renegotiate volumes, but not prices. It did as much with ArcelorMittal, CVRD said.

BHP Billiton, another large iron-ore producer, said some of its smaller customers, who are having difficulty obtaining credit, are trying to buy iron ore on the spot market and attempting to alter contract terms. “Many are saying I want to take the tons, [but] please don’t ship it in December, ship it in April,” said Alberto Calderon, BHP’s chief commercial officer. BHP said it is working with those customers and selling the iron ore contracted for December delivery on the spot market — at below-contract prices. BHP said it is generating less revenue than expected on the iron ore but is still making a profit on it.

Australian iron-ore producer Mount Gibson Iron Ltd. said earlier this month that three of its customers had defaulted on their contracts and refused shipments. As a result, the company had to find new customers, who agreed to buy the iron ore, but at a lower price.

Commodity markets have got off to what appears to be another rough week, with BHP Billiton Ltd.(BHP) confirming it has been asked to defer up to 5% of planned iron ore deliveries this year and Macquarie Bank sharply lowering its 2009 price forecasts for most raw materials.
Even the coking coal market, so far seen tight because of some spill-over demand from earlier months when infrastructure constraints and production losses limited shipments, is eventually moving to a surplus.
Despite severe flooding in Queensland which cut production earlier this year, the coking coal market will end the year with a 11 million metric tons surplus, Macquarie’s Commodity Analyst Jim Lennon said in a report Monday.
In addition to cementing the view that the global economy could take several years to recover from the current crisis, the continuation of bad news could mean commodity prices have further room to fall before a floor is found in most cases.
“Bulk commodities are late-cycle commodities, and we can say with some confidence that they will be hit hard come negotiation time,” said ANZ Commodity Strategist Mark Pervan. In early 2008, benchmark coking coal prices tripled and iron ore prices nearly doubled on the year to record highs.
Iron ore price negotiations for 2009, between Chinese steel producers led by Baoshan Iron & Steel C. Ltd (600019.SH) or Baosteel and key global mining companies such as Brazil’s Companhia Vale do Rio Doce (RIO) or Vale, Australian miner Rio Tinto Ltd. (RTP) and BHP are expected to start soon.
That could also set the tone for coking coal prices.
Slowing demand and exports from the U.S. and Australia’s Port of Newcastle prompted Macquarie to cut its coking coal price forecast for the 2009 benchmark contract by 60% to $140 a metric ton, from around $350/ton this year.
Macquarie now expects copper to average $1.70 a pound next year, down 43% from its previous forecast; aluminum is likely to average 90 cents per pound, down 31% from its previous forecast.
London Metal Exchange copper is currently trading around $3,710/ton, down nearly 60% from a record $8,940/ton in early July, despite producers announcing project deferrals and disappointing output at existing mines.
No Respite Seen Even After Next Year
The bad news for the market is likely to stretch into 2010, Macquarie said, lowering its forecasts for 2010 by 12% to 30%.
For bulk commodities, 2009 iron ore contract prices are now expected to fall 20% for Australian fines to $115.70/ton, and by 15% for Brazilian ore to reflect changes in the freight market, Macquarie said.
That is roughly in line with those of other analysts although some, such as UBS and ANZ, are forecasting a drop of as much as 40% in iron ore prices next year.
Slowing steel demand and falling steel prices have forced every iron ore producer, including BHP now, to re-state their forecasts for next year.
BHP, which Monday said it had received requests from customers for shipment deferrals of up to 5% of its 2008 iron ore production, worth around $600 million at current contract prices, was the last major miner to officially confirm a slowdown in demand.
Last week, Rio Tinto said it was cutting iron ore production at its Pilbara mine in Western Australia by about 10%. Before that, Vale, the biggest iron ore producer in the world, said it would cut 2008 production by 30 million tons, or 9% of annual output, in response to worsening market conditions.
Fortescue Metals Group Ltd. (FMG.AU), last week said its 2008 iron ore production will come in about 10% lower than planned.
The market is likely to get worse before it gets better, analysts said.
“There are three phases. We’re in the first with the current crisis… a very uncertain environment as it’s very early days. Signs are that we’re moving downwards. For China, the direction is distinctly downward,” said Michael Dixon executive general manager at Australian minerals consultancy AME AME.
China is the biggest consumer of most bulk commodities such as iron ore and coking coal and it was slowing Chinese demand that led to the sudden deterioration of market sentiment in recent months.
“The current crisis only really started two months ago, leading on from the banking crisis, and a recovery might be up to three years away,” Dixon said.
More Steel Output Cuts May Follow
Fourth-quarter steel output cuts of more than 30% at the world’s largest steel maker, ArcelorMittal (MT), as well as Corus and other companies around the world, is leading to a sharp downward correction, with global steel production expected to be cut by 12% to 15% on year during the current quarter, Macquarie said.
Recent economic data suggest more output cuts may be likely.
Aside from the euro-zone economy shrinking by 0.2% during the third quarter, Japan’s government Monday said the world’s second largest economy had entered a recession with a second straight quarter of economic contraction, shrinking by 0.4% on an annualized basis.
Against this backdrop, demand for steel making raw materials, such as scrap, coking coal and iron ore, has “clearly collapsed,” leading to plunging freight rates and lower spot prices, according to Macquarie.
While UBS and ANZ expect iron ore contract prices to fall by 40%, while AME thinks coking coal prices will drop to about $200/ton or less.
“The production cuts among end-users highlight the downside risk to these markets, and we haven’t yet seen all likely steel production cuts,” said Pervan.

Gold N.Y. Spot $ 738.25
Silver N.Y. Spot $ 9.40
Lead LME Cash $ 0.5697
Copper LME Cash $ 1.6239
Zinc LME Cash $ 0.5080
Nickel LME Spot $ 4.72
Aluminum LME Spot $ 0.8255
Platinum N.Y. Spot $ 0821.50
Palladium N.Y Spot $ 218.00
Oil WTI Cushing $ 058.00
Natural Gas (Henry Hub)($/MMBtu) $06.33

USD-AUD $ 1.5366
AUD-USD $ 0.6508
CAD-USD $ 0.8165
USD-CAD $ 1.2247
EUR-USD $ 1.2670

Gold N.Y. Spot $ 743.50
Silver N.Y. Spot $ 9.50
Lead LME Cash $ 0.6114
Copper LME Cash $ 1.6878
Zinc LME Cash $ 0.5436
Nickel LME Spot $ 5.03
Aluminum LME Spot $ 0.8559
Platinum N.Y. Spot $ 0844.5
Palladium N.Y Spot $ 217.00
Oil WTI Cushing $ 056.80
Natural Gas (Henry Hub)($/MMBtu) $06.32

USD-AUD $ 1.5101
AUD-USD $ 0.6622
CAD-USD $ 0.8120
USD-CAD $ 1.2315
EUR-USD $ 1.2696

Gold N.Y. Spot $ 746.40
Silver N.Y. Spot $ 10.11
Lead LME Cash $ 0.6396
Copper LME Cash $ 1.8144
Zinc LME Cash $ 0.5021
Nickel LME Spot $ 5.40
Aluminum LME Spot $ 0.8936
Platinum N.Y. Spot $ 0866.50
Palladium N.Y Spot $ 224.00
Oil WTI Cushing $ 063.70
Natural Gas (Henry Hub)($/MMBtu) $06.60

USD-AUD $ 1.4543
AUD-USD $ 0.6876
CAD-USD $ 0.8450
USD-CAD $ 1.1835
EUR-USD $ 1.2816

Gold N.Y. Spot $ 747.20
Silver N.Y. Spot $ 10.31
Lead LME Cash $ 0.6700
Copper LME Cash $ 1.8461
Zinc LME Cash $ 0.5193
Nickel LME Spot $ 5.46
Aluminum LME Spot $ 0.9122
Platinum N.Y. Spot $ 0878.00
Palladium N.Y Spot $ 217.50
Oil WTI Cushing $ 069.20
Natural Gas (Henry Hub)($/MMBtu) $06.79

Exchange Rates
USD-AUD $ 1.4337
AUD-USD $ 0.6975
CAD-USD $ 0.8697
USD-CAD $ 1.1499
EUR-USD $ 1.3035

The Australian mining sector may be forced to radically scale back iron ore production as demand for steel crumbles due to the global slowdown.
Only days after announcing a major cut in its iron ore production levels, Brazilian mining giant Companhia Vale de Rio Doce has withdrawn demands for price increases from Chinese steelmakers.
The chairman of Baosteel, China’s largest steelmaker, Xu Lejiang yesterday described Vale’s price demands as ”bad timing when the global steel industry is in the throes of winter conditions”.
The slowing demand has already forced Vale to cut its annual iron ore production by 30 million tonnes.
This faltering demand for iron ore, which is used to make everything from sewing needles to skyscrapers, could have a very destabilising impact on the Australian miners that are saddled with huge debts or on the verge of running out of cash.
The China Iron & Steel Association warned the global slowdown has curbed demand for steel products, dampened prices and resulted in Chinese steel mills being unprofitable last month.
Mr Xu warned that China’s steel industry faces “a possible whole industry deficit in the fourth quarter” underlining the ”serious imbalance in demand and supply”.
Vale chief executive Roger Agnelli said that some steel companies have slashed their demand by up to 40 per cent in recent months, which will in turn hurt iron ore producers.
Mr Agnelli said the global economic slowdown was “brutal” with commodity prices dropping swiftly in recent months.
Across the industrial sector demand for iron ore is down 20 per cent on average.
“There are some parts of the world where people don’t want to buy anything,” Mr Agnelli said.
“Nothing, nothing, nothing.”
Vale refused to say how long it will close some of its production plants and mines.
A spokesman of BHP Billiton said the miner will maintain its policy of investing across the economic cycle.
“We are maintaining production and remain committed to our investment program,” the spokesman said.
Last week Fortescue Metals announced plans to suspend a $2 billion expansion project for at least six months.
A spokesman for Rio Tinto refused to comment on its planned iron ore production levels.
But the miner is believed to be looking at its spending levels including plans to scale back some of its expensive aluminium production.