Commodity Blog

Archive for November, 2008

Gold N.Y. Spot $ 726.70
Silver N.Y. Spot $ 09.80
Lead LME Cash $ 0.6577
Copper LME Cash $ 1.7958
Zinc LME Cash $ 0.4990
Nickel LME Spot $ 5.15
Aluminum LME Spot $ 0.8913
Platinum N.Y. Spot $ 0819.50
Palladium N.Y Spot $ 202.00
Oil WTI Cushing $ 065.50
Natural Gas (Henry Hub)($/MMBtu) $06.23

USD-AUD $ 1.4775
AUD-USD $ 0.6768
CAD-USD $ 0.8220
USD-CAD $ 1.2165
EUR-USD $ 1.2722

UBS has slashed its 2009 commodity prices forecasts by an average of 37%, in line with cutting expectations for global growth to slow to 1.3% next year, from an earlier forecast of 2.2%.
That prompted considerable cuts to commodity forecasts for 2009 and 2010, with copper expected to trade at an average of US$1.30 a pound (US$2,865 a metric ton) compared with a current price of US$1.90/lb. Oil is expected to average US$60 a barrel in 2009, with iron ore facing a 40% price decline.
“We expect that base metals prices are likely to dip meaningfully below marginal costs in 2009, given the extent to which demand is likely to contract,” UBS said in a client note.
The contraction in credit and finance is unlikely to ease in the near term, UBS said. It expects the impact to continue to reverberate for the next one to two years, capping global growth and resulting in soft demand for commodities.
UBS also trimmed long-term price forecasts for base metals, cutting copper to US$1.50/lb, down 14%, aluminum to US$1.10/lb, down 12%, nickel to US$7.00/lb, down 18% and zinc to 65 cents/lb, down 19% on its previous estimate.
Only gold remained relatively unscathed, even though the systemic risk that supported gold through the credit crisis up until now has somewhat been alleviated by action from central banks.
But those risks haven’t vanished, meaning gold and gold equities will remain of interest to investors, UBS said.
UBS expects gold prices to average US$825 a troy ounce next year, down 15% on the previous forecast.
Bulk commodities, the long-standing preferred picks among analysts, won’t escape downside pressure, with huge production cutbacks among steel producers lowering demand for iron ore and coking coal.
“While the large (iron ore) suppliers are likely to cut back on production in order to mitigate some of the loss in demand, we expect that they will need to cut pricing, effectively giving up the price increase achieved in 2008,” said UBS, expecting next year’s contract price to fall 40%.
Coking coal contract prices will likely fall to US$180/ton, down from US$300/ton this year.

Gold production was “in crisis” and a gold price of $900-to-$1 000/oz was needed to arrest the downward trend, AngloGold Ashanti CEO Mark Cutifani said on Thursday.
Cutifani said that the world had seen a decline in the production of gold across the globe in the past seven years, and that the industry could experience another decline of production at up to 5% a year for the next five years.
“The gold industry from a production perspective is in crisis,” he said.
There had been a 20% to 30% production decline in South Africa in the last five years and grades are continuing to diminish in opencast mines around the world.
That lack of production, he said, would result in gold’s fundamentals improving.
Recovery of production was now being set back by the current global financial crisis, which would exacerbate the current problem.
“We need something in the order of $900/oz to $1 000/oz for there to be ongoing and sustainable investment in gold, to turn that trend around,” he added.
On a fundamentals basis, the industry was not investing enough in future production and, as a consequence, there were also increasing cost pressures on those operations that were going deeper and increasing strip ratios.
“On fundamentals, we believe that the gold price will be strong, and certainly we’ve been encouraged that gold has performed relatively well through the current crisis, particularly in the financial market with redemptions.
“Is it next month, is it the next three months, or is it the next six months that we will see the fundamentals fully assert themselves, and again move towards that $1 000/oz target that we see long-term sustainability?” he asked.
“If you look at the price of gold in the last month or two, it has done much better than all of the other commodities, because the fundamentals are still at play,” he said.
Cutifani said that there had been nowhere near the same level of expansionary investment in more gold production as there had been in other metals.
“Certainly, as the most competitive, total-cost operator in the major space in the gold industry, we are positioned to outperform any other major player in gold,” he added.
Cutifani said that the September quarter had been a tough one, with gold trading in a range from a high of $988/oz to a low of $736/oz, post quarter seeing a dramatic selloff across all markets and gold dipping below $700/oz and the rand weakening to R11 to the dollar.
AngloGold Ashanti was expecting a gold production of 1,25-million ounces and total cash costs of $460/oz, on exchange-rate assumptions of R8,40/$, A$/$0,80, Brazilian 1.9/$ and an Argentinean peso 3,11/$.
“As of the first quarter of next year, you will see our discount on stock price go from what would have been 18% before we started the accelerated hedge book reconstruction, to around 6% in the first quarter.
“What that actually means is around $250-million more revenue in a quarter as a consequence of taking that hedge book off, if the gold price is, say, $900/oz,” he said.
“That is significant when you consider that we have got the most competitive business on a total cost basis in the world of gold,” he said.
Credit Suisse Standard Securities research analyst Dr David Davis commented that AngloGold Ashanti’s cost structures were “competitive” and the uranium credits might assist the company. The capital cost structures of gold companies like Barrick and Newmont were higher than those of AngloGold Ashanti.
“Certainly, AngloGold Ashanti is well up there,” Davis said.
Afrifocus Securities mining analyst Mark Madeyski told Mining Weekly Online that he was impressed with the current AngloGold Ashanti, which had brought in ”some very good management”.
“But their operations are getting deeper, and they seem overly optimistic on safety. You will never eliminate fatalities, not at these depths,” he said.
Also, travel time to the face was becoming excessive.
The Anglogold Ashanti performance for the third quarter 2008 included:
* Delivery for the third consecutive quarter on production and cost guidance, with continued reduction in the hedge book;
* Production at 1,265-million ounces, 1% higher than previous quarter, with Obuasi and Cerro Vanguardia posting substantial improvements;
* Total cash costs at $486/oz — better than guidance but higher than the previous quarter, owing to wage increases, power tariffs, inflation and inventory movements — while costs are expected to reduce to approximately $460/oz in the fourth quarter;
* Continuing safety focus, with lost time injury rate improving 10% and despite four fatalities during the quarter, the fatality rate reduced for the year by 60% against the same period in2007;
* Uranium production up 7% to 346 000 pounds, with enhanced exposure to the spot market expected in the fourth quarter;
* Hedge-book commitments reduced by 580,000oz during the quarter, with the company on track to reduce book to 6-million ounces by year-end;
* Adjusted headline loss of $119-million incurred, as a result of accelerated hedge reduction;
AngloGold Ashanti reported an increase in gold production on 1,265Moz, 1% higher than the previous quarter and in-line with guidance.
Cerro Vanguardia in Argentina and Obuasi in Ghana posted significant improvements against the previous quarter, with gold production increasing.
The South African operations continued to perform steadily, using 92,4% of power supply, while operating at 100% production capacity.
The total cash costs for the quarter at $486/oz, were higher than the prior quarter’s $434/oz due to input cost inflation, annual wage increases, higher power tariffs and inventory adjustments, but were within market guidance of $490/oz.
The company also reduced its hedge commitments by 580 000 oz during the quarter, with a total hedge reduction year-to-date of almost 5-million ounces. As a result of the continued accelerated hedge reduction, the company received a price of $644/oz and posted an adjusted headline loss of $119-million.
Net debt was reduced from $2,7-billion at the end of June 2008 to $1,23-billion at the end of September 2008.

The global financial meltdown should have settled the long-standing debate between gold bugs who consider bullion the ultimate store of value and those who think the yellow metal is merely another commodity.
Instead, it’s proven both camps wrong, at least so far, according to Peter Munk, the founder and chairman of the world’s largest gold miner, Barrick Gold Corp.
“Unfortunately, the problem is that gold falls between those two things,” Mr. Munk said in an interview yesterday after Toronto-based Barrick reported a 26- per-cent drop in third-quarter profit to $254-million and reiterated its production and cost guidance for the year.
If ever there was a time for gold to shine, it should have come with the collapse of Lehman Brothers and other financial institutions worldwide.
Gold soared during the market crash of 1987 and in the months following the Sept. 11, 2001, terrorist attacks.
Yet during the biggest financial crisis since the Great Depression, bullion has tumbled from its all-time high of $1,032 (U.S.) in March, to less than $700 an ounce last week.
“The unprecedented storm we have just gone through is the ideal condition that gold bugs always foresaw as being the day you are holding gold for, because it will go through the roof. … It begs the question, has the global financial collapse divorced itself from gold and if so, what kind of store of value is it?” Mr. Munk said.
At the same time, gold hasn’t imploded like other commodities. Metals including nickel, copper and aluminum have each fallen by more than 50 per cent. Had it tracked the price of zinc, sulphuric acid or soy beans, gold might be fetching less than $400 an ounce. Gold closed at $738.50 yesterday, down $15.50.
“That shows you that anybody who is saying it is just a commodity is wrong,” said Mr. Munk, who is Barrick’s acting chief executive officer.
So what happened? According to Mr. Munk, gold became a victim of its own success. During the darkest days of the crisis, when lending completely dried up, no one could borrow money from banks, including the world’s wealthiest individuals, many of whom the octogenarian entrepreneur pals around with.
Gold, which had appreciated sharply over five years from less than $400 an ounce, became the only source of liquidity for short-term funding obligations. From hedge funds and mutual funds to the European construction company, Mr. Munk believes selling gold was the one option many had to raise capital without taking a nasty loss.
At the same time, the unexpected rise in the U.S. dollar, spurred by the government injection of more than $1-trillion to encourage lending and prop up failing financial institutions, has further weakened the gold price.
The greenback’s stunning rise has been inversely correlated to gold’s decline. Mr. Munk believes the U.S. dollar is certain to fall and that can only mean better times for the gold price.
In response to the downturn, Barrick said it is reviewing its capital spending and could delay some projects. Mr. Munk conceded the company is also considering bargain hunting for rival gold producers amid the stock market carnage.
“When there is blood on the streets, you buy, you don’t sell,” he said.
He may not be in the CEO’s seat when the next deal happens. Barrick has compiled a short list of candidates to replace Greg Wilkins who had to step down because of illness and a decision is expected by year-end.