Commodity Blog

Archive for February, 2009

Steel companies must consider shelving all growth capex plans as soon as possible if the global steel industry is to have a sustainable future, Credit Suisse warned in a report Wednesday.
Warning of the dangers of oversupply in coming years, the bank added that failure to achieve this would ultimately lead to further forced plant closures, likely rounds of protectionism and subnormal returns for potentially the next decade at least.
Explaining the new dynamic driving steel markets in the wake of a 450 million mt drop in global steel demand, the bank said we have returned to supply-led cycles, like the 1980s and 1990s, where regardless of a potential 3–5% global demand growth trend once the cycle has normalized, the level of excess capacity means that supply fluctuations will drive the cycle for steel again, and not demand.
If the steel industry proceeds as it had planned with plant capacity additions, there is a real risk of far greater excess capacity than in the 1980s and 1990s and consequently utilization rates that are structurally too low to sustain the industry in its current form, CS warned.
To illustrate the magnitude of the likely oversupply problem, CS produced forecasts of new capacities, predicting 90 million mt of capacity would be added in 2009, 95 million mt in 2010, 89 million mt in 2011 and 76 million mt in 2012. In every year, China accounts for 40–60% of additional capacity, with India in second place.

Gold N.Y. Spot $ 973.00
Silver N.Y. Spot $ 14.06
Lead LME Cash $ 0.4559
Copper LME Cash $ 1.5193
Zinc LME Cash $ 0.4992
Nickel LME Spot $ 4.41
Aluminum LME Spot $ 0.5865
Platinum N.Y. Spot $ 1049.00
Palladium N.Y Spot $ 199.50
Oil WTI Cushing $ 040.60
Natural Gas (Henry Hub)($/MMBtu) $04.20

USD-AUD $ 1.5485
AUD-USD $ 0.6458
CAD-USD $ 0.8019
USD-CAD $ 1.2470
EUR-USD $ 1.2694

Total South African gold production fell by 13.6% to 220,127 kg in 2008, the lowest level of production since the 218,031 kg produced in 1922, the country’s Chamber of Mines said Tuesday.
The 13.6% decline was also the largest single drop in gold production since the strike-induced 13.8% decline in 1922, the CoM noted.
“Key reasons for the year-on-year decline in gold production include the impact of the electricity supply curtailment in early 2008, which forced downsizing in the gold mining industry and the significant impact of safety-related closures,” the CoM said in a statement. “The mining of lower average grades facilitated by higher prices also contributed to the decline in production.”
The closure of the gold mining sector from January 24–31, 2008, was the first time that the South African gold mining sector had been closed since the Anglo-Boer war between 1900 and 1902, the CoM noted.
While South Africa had slipped to world production position 2 behind China in 2007 the country’s rank declined a further position to third in 2008 after China and the US, it added.
In the fourth quarter of 2008, South Africa’s total gold production decreased by 0.9% to 55,242 kg when compared with the third quarter of 2008; on a year-on-year basis, gold production was down by 10.7% in the fourth quarter.
For gold mines members of the Chamber, production decreased by 16.8% to 182,490 kg in 2008. The 4.2% decline in tons milled to 51 million mt combined with the 13.1% decline in the average grade contributed to the overall decline, the CoM said.
But despite the decline in production, South Africa’s gold mining sector “remains a crucial part of the economy,” the CoM stressed. In 2008, the industry employed 166,000 people (average first three quarters), paid about Rand 15.5 billion ($1.55 billion) in salaries and wages, spent about Rand 14 billion on procuring goods and services in the local economy, accounted for about 2.5% of GDP (directly, indirectly and induced), spent about Rand 9 billion on capex, paid about Rand 4 billion in taxes, and earned about 7% of the country? s merchandise exports (or about Rand 48 billion), the CoM said.

Even as the Chinese government moves quickly to help struggling domestic metals producers by stockpiling their products and reducing export taxes, industry participants are concerned those very actions could prolong the slump in the sector.
Such actions are already distorting trade flows by masking the real supply-demand situation in the country, they said.
Government stockpiling and tax and tariff changes to support base metals prices may depress international prices in the longer term if it delays capacity closures necessary to restore supply and demand balance, Barclays Capital said in a note Tuesday.
That warning comes close on the heels of similar views expressed by Australia’s Macquarie Bank which said China’s State Reserve Bureau may buy up to 1 million metric tons of aluminum to support the market.
“Our concerns about this are twofold — first, it will delay production-cut decisions in China and second, the SRB has no need to hold a stockpile of aluminum in the long term and (therefore) is likely to offload this material when the market starts to recover, potentially delaying any recovery in prices,” Macquarie said in a note Monday.
Some producers may already be rethinking production cuts as the government is expected to announce a slew of export incentives in a widely talked about industry restructuring and rehabilitation plan.
China will likely raise the export tariff rebates — effectively lowering export taxes — on metals products, China Business News reported Tuesday, citing a draft stimulus plan for the metals industry.
To increase exports of value-added products, the government plans to raise export rebate on products such as refined copper tubes, refined copper plates, aluminum foil and aluminum plates to 13% from 5% now, said the report.
The government also plans to introduce an export tax rebate of 5% on aluminum alloy where none existed before, the report said.
The plan has yet to receive final approval from the State Council, China’s cabinet, a senior official at the China Nonferrous Metals Industry Association said Monday.
But it could happen soon and details of the plan may be officially announced this week, said Yang Changhua, an analyst with state-owned Antaike metals consultancy.
Imports Rising Despite Poor Domestic Demand
Government action to support the market is already seeing some unintended results.
The relatively robust performance of most base metals imports in January, based on data released by China’s customs department Monday, belies slowing domestic demand, Barclays pointed out.
Chinese primary aluminum imports, for example, rose 19% on year in January to an almost two-year high, mostly because aluminum futures on the Shanghai Futures Exchange command a premium of $500 a metric ton to London Metal Exchange prices.
“This has attracted growing volumes of imported metal, leading to calls for an import tax,” Barcap said. “The Chinese aluminum market is vastly oversupplied.”
SHFE prices should be at a discount to LME, but the State Reserve Bureau’s stockpiling decision “is creating the price distortion,” the report said.
“This is bad news for the aluminum market, as higher prices are creating a (disconnect) between supply and demand by delaying production cuts and encouraging some production to be restarted at a time when demand is falling and the surplus is growing rapidly,” it said.
Following meetings with 11 Chinese aluminum smelters in Beijing last week, SRB is likely to buy another 290,000 tons of aluminum in March, the same amount it bought in January, to help the local industry through the downturn, Macquarie said.
May Lead To Higher Import Taxes On Some Metals
Macquarie expects more state buying in the months ahead with a total planned purchase of as much as 1 million tons, prompting even more imports and the need for higher import taxes at some stage.
Last week, the China Non-ferrous Metals Association said the government had no plans to reinstate aluminum import tariffs, but “at some point, authorities may have to impose import duties to prevent net imports of the metal,” Macquarie said.
“Although Chinese officials have denied speculation about a potential rise in the aluminum import duty, we believe this view can be rapidly adjusted if aluminum imports jump in the coming months, as is starting to appear likely,” the Australian bank said.
The same could be true for other base metals as well.
Lead imports in January were up 13% on year as stronger demand supported domestic prices, with lead currently trading at a premium of around $430/ton to LME.
“We are hearing that Chinese physical demand has started to soften and with the seasonally slower second quarter just around the corner, we expect a decline in imports over the coming months,” Barcap said. Lead concentrate imports have already fallen 7% on year, reflecting slower demand from smelters.
Zinc imports rose to four times the level seen in January 2008, reflecting ongoing arbitrage play, while a fall in zinc concentrate imports by 15% on year reflected weaker smelter demand and production cuts, said Barcap.

China is taking advantage of the economic downturn to go on a major shopping spree, investing in energy and other natural resources that could give it an economic advantage it has never had before.
Some economic analysts say they believe that China’s investments pose a threat to competitors like the United States. In the last move, Beijing said on Friday that one of its big state-owned banks, the China Development Bank, would lend the Brazilian oil giant Petrobras $10 billion in exchange for a long-term commitment to send oil to China.
China signed similar deals this week with Russia and Venezuela, bringing Beijing’s total oil investments this month to $41 billion. They represent an important investment. Supplies of commodities like oil are likely to tighten again once global growth picks up, and China will have a toehold it lacked during the recent boom, when it grew phenomenally even with limited access to resources.
But some analysts say China’s recent investments are welcome because they will help finance much-needed development, increasing the global supply of oil and natural resources at a time when many of the world’s biggest banks are reluctant to lend.
“It’s a good thing because a lot of projects have been postponed,” said Prof. Philip Andrews-Speed, director of the energy policy center at the University of Dundee in Scotland. “Oil companies may now have the money to produce oil.”
It is not just oil. This month, China’s biggest aluminum producer also agreed to invest $19.5 billion in Rio Tinto, an Australian mining company that is one of the world’s biggest. On Monday, China Minmetals bid $1.7 billion to acquire OZ Minerals, also of Australia, a huge zinc mining company.
China is flush with cash — thanks to trillions of dollars from decades of selling goods to the West — at a time when credit markets are tight and collapsing commodity prices have left energy and natural resource companies desperate for cash. For many of these companies, China has gone from pariah to lender of first resort.
“This is heavy energy diplomacy,” Professor Andrews-Speed said. “If you need money, you go to where the money is, and today, China’s the place.”
President Hu Jintao of China traveled this week on his “Friendship and Cooperation Tour” in Africa, where China has huge interests in resources and mining. The vice president, Xi Jinping, visited South America, met with the leaders of Brazil and Venezuela and signed cooperation agreements on oil and minerals.
Venezuela borrowed $6 billion from China and agreed to increase its oil exports to China, bringing China’s total investment in the country to $12 billion. In Brazil, China signed a $10 billion “loan-for-oil” deal that guarantees the country up to 160,000 barrels a day at market prices.
And in Beijing this week, Prime Minister Wen Jiabao met his Russian counterpart after China agreed to lend Russia’s struggling oil giant Rosneft and Russia’s oil pipeline company, Transneft, $25 billion in exchange for 15 million tons of crude oil a year for 20 years.
The investments are China’s biggest moves since 2005, when a Chinese state-owned oil company made an unsuccessful bid for Unocal, the American oil company, prompting worries about whether fast-growing China was seeking to tie up global resources.
But the world has changed drastically since then. Commodity prices have fallen sharply in recent months, after a long bull market that was partly fueled by China’s voracious demand for energy and resources. And China has built up nearly $2 trillion in foreign currency reserves, giving the country easy access to capital.
“What’s changed for China is that their key competitive strength has increased, and that’s capital,” said Andrew Driscoll, a resources analyst at CLSA, an investment bank. “A lot of companies are begging for capital.”
China wants reliable supplies of crude oil to fuel its growing transport sector; it needs iron ore for steel production, and copper and aluminum to build homes and consumer goods.
Analysts say there are still worries about whether China will compete with other nations, like the United States and India, for oil and other natural resources.
Analysts say China could continue to make deals this year for small oil and gas companies, mineral producers and mining firms.
This week, for instance, shares of the Fortescue Metals Group, an Australian mining company, rose after reports the company was in talks with China over a big investment to help the company expand operations.
In many cases, China has struck deals in countries that have access to large supplies of oil and minerals but where American and European countries are not well positioned, like parts of Africa and the Middle East. In one of the deals struck this week, China made an alliance with the government of Hugo Chavez, the president of Venezuela, who has denounced American leadership. While the oil deals announced this week vary in terms, analysts say they ensure China a steady supply of oil for decades to come, sometimes at favorable prices.

Steel demand in China, the world’s largest user of the metal, may improve later this year as extra state spending kicks in, with more than 60 percent of mills losing money at present, the China Iron & Steel Association said.
“We are pinning our hopes on the government’s stimulus measures to revive domestic demand,” Vice Chairman Luo Bingsheng told reporters today in Beijing. “Hopefully the situation can improve in the second or third quarter.”
China is spending 4 trillion yuan ($585 billion) to stimulate the world’s third-largest economy and stave off the impact of the global recession, which has slashed exports. China’s cabinet on Jan. 14 approved guidelines to bolster the steel industry, including accelerated mergers and acquisitions.
“We haven’t seen obvious signs of demand recovering in the first quarter,” said Luo. The stimulus package will boost government spending on housing and transportation projects, such as upgrading railway links.
Still, Baoshan Iron & Steel Co., China’s second-biggest stainless steel producer, has said that the outlook has improved. Baoshan said on Feb. 16 that it was boosting stainless output as demand from some customers “is picking up.” The Shanghai-based company last month raised steel prices for March delivery.
‘Thin Profit’
“Only some privately owned steel mills may have begun to make thin profit due to lower production costs compared with state-run steelmakers,” said Qi Xiangdong, the association’s deputy secretary-general.
China’s steelmakers had an aggregate loss of 29.1 billion yuan in December after losing 12.8 billion yuan in November and 5.84 billion yuan in October, the China Business News said Feb. 20, citing Shan Shanghua, the association’s secretary-general.
Amid waning demand from builders and automakers, China had 660 million tons of steel-making capacity last year, about 160 million more than production of 500.5 million tons, the association said today. Crude steel output this year may be between 490 million and 500 million tons, Luo said.
The government may further adjust tax rebates on some steel products and remove so-called tolling, the association’s Qi said. Tolling refers to the tax-free import of goods that are processed for export.
China’s steel association represents the nation’s largest mills. The comments from Luo and Qi were made at a regular media briefing in Beijing.

Aggressive de-leveraging and hedge fund liquidation may have sunk the global commodity market the first time around. But it’s the stagnant global economy that is conspiring to keep it underwater.
When the Reuters/Jefferies CRB Commodity Price Index rebounded 2.3 per cent yesterday, it was a welcome respite in a relentless rout that had knocked the commodity market to its lowest levels in nearly seven years. The bounce ended seven consecutive days of declines for the CRB index, during which time the benchmark had lost 11 per cent, relinquishing whatever modest gains it had mustered from its previous lows of early December.
Analysts say that while they don’t see much more room for most commodities to fall, the latest selloff is a signal that a second wave of worries has overtaken the commodity market. While the credit market crisis and hedge fund redemptions triggered the rapid exodus from commodities over the fall, now the deepening slowdown in physical demand for these products is entrenching the low- price environment.
“[Hedge fund liquidation] is becoming less and less of a factor. But the macro [economic] situation is just killing us,” said Edward Meir, commodity analyst at MF Global in Darien, Conn.
With most economists now seeing the economic slowdown lasting considerably longer than had been anticipated a few months ago, experts generally expect prices for many key commodities to drift sideways for much of this year. They said that while the low prices for some products will discourage production, that will be outweighed by the severe and lingering dearth in demand.
“In the near term, I don’t see a big break in the recent trend,” said Derek Burleton, senior economist at Toronto-Dominion Bank. “Commodity markets are going to remain very focused on the demand side.”
“A more meaningful recovery in commodities may have to wait until 2011.”
Within that dim general view, there are varying degrees of pessimism and hope for the key commodities in the Canadian market:
OIL
The weak demand and high inventories for crude should keep prices in their recent range of roughly $35 (U.S.) to $50 a barrel for much of 2009. However, analysts say oil should get support from the fact that at current price levels, new supplies will slow to a trickle.
“When you’re down at these kinds of [price] levels, the only part of the world where you can bring on new projects is the Middle East,” said Patricia Mohr, commodity market specialist at Bank of Nova Scotia, who predicts that global oil production will actually fall this year.
As a result of this supply slowdown, she said, “once we see some glimmer of hope on the global economy, you’ll see prices come back quite quickly.”
Analysts are looking for prices to average $75 to $80 a barrel in 2010.
GOLD
Gold has bucked the downward trend in commodities, as investors have flocked to it as a safe haven from plunging financial markets and economic and political uncertainties.
While the continued high-risk environment could well keep upward pressure on prices in the short term, and soaring U.S. government debt levels could turn investors away from U.S.-dollar debt and toward gold in the longer term, analysts are concerned that gold’s recent rally may be getting overdone, with gold approaching last year’s record peaks above $1,000 an ounce.
“But the main point is that gold seems to be able to maintain its value,” Ms. Mohr said, which should continue to attract investors to bullion-based exchange-trade funds and to gold equities.
COPPER
Copper is stuck in no-man’s land.
The price is depressed as a result of sluggish demand, but it’s still high enough to keep most producers profitable, meaning little pressure to slow production.
“The big declines are probably behind us,” Mr. Meir said. However, he said, prices in 2009 “are going to be in a sideways pattern.”
However, Ms. Mohr said copper should benefit from government stimulus efforts aimed at expanding electricity infrastructure, particularly in China.
ALUMINUM
Unlike copper, analysts said aluminum prices have fallen considerably below most producers’ cash costs, which is triggering production cuts and killing new mining projects in their tracks.
“In aluminum, everyone is in the red. Everyone is struggling,” Mr. Meir said.
That suggests that even a modest recovery in demand could put upward pressure on what could become a very tight market on the supply side. Analysts said the situation isn’t that different in other base metals, such as zinc and nickel.
“I think all of them are oversold,” said Bart Melek, global commodity strategist at BMO Nesbitt Burns.
CANOLA
Ms. Mohr believes canola is poised to be a strong performer this year.
It’s an attractive product for Canadian farmers because of its traditionally strong profit margins, and could benefit from the threat of drought in some of China’s key canola-growing regions. She said China has already been stockpiling canola in the past months.
TD’s Mr. Burleton thinks agricultural commodities in general look promising. He added that drought worries in several parts of the world could also bode well for grain prices.

Zinc and lead consumption in Europe and Japan fell to their lowest levels last year since at least 2005, according to the latest figures from the International Lead & Zinc Study Group (ILZSG). Consumption of refined zinc in Europe fell 232,000 tonnes — or 8.1% -to 2.62 million tonnes in 2008 from the previous year as the economic slowdown hit galvanizers and others that use zinc, the ILZSG’s figures show. Lead usage in Europe dropped 126,000 tonnes to 1.81 million tonnes, down 6.5% year-on-year, it said, as demand from the battery sector fell. Japanese users cut zinc consumption by 18,000 tonnes or 3.1% to 570,000 tonnes, while lead consumption in the country fell 11,000 tonnes or 3.9% to 268,000 tonnes.
Global lead usage rose 6.4% year-on-year to 8.71 million tonnes, powered by China, where it grew by 24.8% to 3.21 million tonnes. Refined lead production in China jumped 15% to 3.21 million tonnes last year. The country’s exports fell 209,000 tonnes in 2007 to 35,000 tonnes.
Net imports of lead in concentrate rose for the sixth consecutive year to a record 795,000 tonnes, the ILZSG said. Demand for lead recovered partially in the USA, climbing 4% year-on-year to 1.57 million tonnes. This was still below the level of 2006, though, when the USA consumed 1.62 million tonnes, the trade body said. But worldwide production grew to 8.73 million tonnes, creating a surplus of 19,000 tonnes, the ILZSG said. “This is the first time world production has exceeded usage since 2002,” the ILZSG said.
World refined zinc production rose 2.9% to 11.68 million tonnes, exceeding demand by 195,000 tonnes. “After peaking in June, monthly refined zinc metal output fell off during November and December as a consequence of a number of closures and cutbacks,” the trade body said. Canadian producers cut 41,000 tonnes of zinc output, or 5.1%, to 761,000 tonnes last year, it said. Producers in Europe slashed output by 1.7% to 2.47 million tonnes as refiners in China increased production by 170,000 tonnes, or 4.5%, to 3.91 million tonnes. The country’s imports of zinc metal exceeded exports by 111,000 tonnes in 2008. This is a reversal of 2007, when China’s exports were 127,000 tonnes higher than imports, the ILZSG said.

Gold N.Y. Spot $ 968.65
Silver N.Y. Spot $ 14.04
Lead LME Cash $ 0.4999
Copper LME Cash $ 1.4835
Zinc LME Cash $ 0.4942
Nickel LME Spot $ 4.52
Aluminum LME Spot $ 0.5942
Platinum N.Y. Spot $ 1085.50
Palladium N.Y Spot $ 217.00
Oil WTI Cushing $ 035.10
Natural Gas (Henry Hub)($/MMBtu) $04.60

USD-AUD $ 1.5684
AUD-USD $ 0.6376
CAD-USD $ 0.8041
USD-CAD $ 1.2437
EUR-USD $ 1.2568

The US House of Representatives passed the $789-billion stimulus bill by a 246 to 183 vote on Friday, and the American Iron and Steel Institute praised Congress and President Obama. In a Friday statement, the Washington-based AISI pointed to key spending items included in the bill “and of note to the industry are spending on transportation and infrastructure–including industry-supported Buy America language.”
“We thank President Obama for his efforts, and Congress on their expedient action to pass this stimulus package, which will help to put Americans back to work and get America’s economy back on track,” said Thomas J. Gibson, president and CEO, AISI.
The steel trade group said included in the transportation and infrastructure spending in the bill are: $27.5 billion for highways and bridges; $8.4 billion for public transportation; $1.3 billion for aviation; $9.3 billion for high-speed rail and other rail investment; and $22 billion in school construction bonds.
The AISI also emphasized that funding for energy programs in the bill totals $37.5 billion and includes upgrading the energy grid, research into clean coal technology and $6 billion in loan guarantees for renewable energy projects. It includes a three-year extension of the production tax credit for wind energy.
In addition, AISI said the bill expands and extends Trade Adjustment Assistance benefits and includes language barring the Bureau of Customs and Border Protection from demanding repayment of duties collected under the Continued Dumping and Subsidy Offset Act on NAFTA goods between 2001–2005.