Commodity market headline (20th of Jan)

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Daily Summary of Baltic Exchange Dry Indices
BALTIC INDICES	INDEX		T/C LEVEL
BDI	1,421	+23	-
BCI	2,026	+97	14,125
BPI	1,564	-6	12,515
BSI	1,165	-10	12,282

Commodity Market assessment for 2014

Commodity investments this year are on track to register their largest ever outflows. The decline in assets under management in the year till November is the largest on record, indicating withdrawal of funds from the sector by global investors. However, despite this bleak outturn, there are signs that some sectors like base metals are starting to generate investor interest again.

 

The Federal reserve's QE stimulus had no major  impact on commodity markets and there are unlikely to be very many negative effects as it is tapered. The exception is in precious metals, where investor holdings in these two markets have fallen sharply and a resulting price crash.  Six commodities markets have seen price gains that are greater than the 120% increase since QE commenced in December 2008. They are palladium, US gasoline, Comex Copper, Brent crude, LME copper and WTI crude.

 

If QE, really had kept commodity prices at levels much higher than those justified by fundamentals, one would by now expect to see higher supplies and lower demand.  Most markets should be in surplus with inventories rising, but in fact the picture across different markets is highly mixed. In oil markets, there are signs of oversupply on some regional markets, notably the US, and in metal markets, producers are not able to cover cash operating costs and are under pressure to shut down. However, precious metals have been very well supported by it with the resulting low cost of holdings for holding precious metals, plus the concern that QE might result in inflationary pressures encouraging many investors to significantly increase their exposure aggressively. The ongoing liquidation of these holdings is likely to continue exerting downward price pressure in precious metals well in to next year.  But in most other markets like base metals and to some extent in energy, it can be interpreted that  the start of tapering as a mildly positive indicator for demand in the year ahead.

 

GOLD

 

For bullion investors, gold has lost its luster. Many bought gold on expectations that the Fed's stimulus measures would weaken the dollar and boost inflation. Those fears didn't materialize and look even less likely now that the Fed is winding down its bond purchases. At the same time, other assets are showing larger returns; U.S. stock indexes are trading near record highs as 2013 draws to a close.

 

2014 will likely tempt investors to further move out of safe havens, and especially out of gold into other risky assets. The more upbeat outlook on the global economy, the reduction of tail risks, and the growing appetite to take on more risk suggests that safe havens like gold will become even more unfashionable.  Gold prices could get very volatile in the coming year as it faces the crosscurrents of an improving macro backdrop, dent in physical demand and, ultimately, the implications on mine production and productions cuts.

 

Potential supports for gold in 2014 are continued low interest rates, reduced scrap, high-cost mine closure, while a renewal of the central bank gold agreement, set to expire in September, would help stem fears of large-scale selling and short-covering activity. A re-emergence of euro zone instability, could work to boost gold prices, as investors turn to safe havens once again. Furthermore, worries over the threat of deflation could see higher gold prices. Although perceived by many as a negative for gold, such worries could exacerbate the debt problems of weaker euro zone economies and force the European Central Bank to loosen monetary policy further, boosting gold prices.

 

Despite, all the above supportive factors, downside risks continue to build in the short to medium-term  for gold. However, we still believe the decline in 2014 to pose a good bargain-hunting opportunity for long-term investment in gold.

 

International Price range for 2014 : $1,100- $1,400

 

Domestic Price range for 2014 : 26,000-32,000 ( Assuming Rupee to be in the 59.00-65.00 range)

 

SILVER

 

It earned the distinction of being 2013′s worst-performing commodity. The silver market has been one of the most volatile and speculative among commodities.

 

The reason for silver's poor performance is well known. Midway through April 2013, the precious metal plunged from over $27 to about $23 following violent action in the gold market, was caused mostly by investors panicking to the potential sale of Cyprus gold reserves.

 

Since then, silver has slowly, but surely, continued to slip downward, pressured in large part by concern that the US Federal Reserve will begin tapering its $85-billion-per-month stimulus program, an anxiety that became a reality in December 2013. However, a big positive for Silver this year is the  Indian silver demand, which has been quietly increasing throughout the year. Also up for question is whether the white metal is set to overthrow gold in popularity in the country, which has long been known for being the world's biggest gold consumer. Silver prices should be underpinned by improving industrial demand in 2014, but they will eventually follow gold for price direction.

 

Looking forward, the weak trend is expected to continue in 2014, but we can say with some degree of certainty that Silver could fall relatively less in 2014 compared to gold and rise relatively more too.

 

International price range: $18-$28

 

Domestic price range: 40,000- 55,000 (  Assuming Rupee to be in the 59.00-65.00 range)

 

CRUDE

 

International crude prices are up 7.2% for the year, but it is unlikely to maintain this in the coming year. Innovative drilling techniques have ramped up U.S. oil production, with the Energy Information Administration predicting output to approach all-time highs by 2016. The flow has allowed the world's largest oil consumer to cut back on its imports, leaving the U.S.'s former suppliers with extra crude on their hands. Iran is negotiating an end to international sanctions in exchange for its cooperation regarding its nuclear program, while Libya is trying to regain stability after a series of protests slashed its oil production in 2013. Combined, Iran and Libya have the ability to export about 3.8 million barrels of oil a day. The hefty supplies would weigh on oil prices. Also, decrease in global travel due to the emergence of technology ( Skype), is also responsible for lower demand growth to a small extent.

 

The outcome of the Federal Reserve’s decision to reduce the pace of asset purchases in December have also been focal points in gauging oil market demand. Although the strong recent US economic data are positive for market sentiment, the effect is unlikely to give significant upside to US oil demand growth as the output continues to rise.  Steady supply availability in the North Sea and moderate demand growth is expected to narrow premiums between Brent and WTI going forward.

 

In the U.S., a train transporting crude oil through North Dakota derailed and caught fire. It is the fourth such accident in six months, on a system struggling to cope with the transport of the larger volumes of oil now being produced from shale plays.  Any higher costs incurred through extra safety regulations may affect oil-by-rail transportation and result in gradual accumulation of oil stockpiles that pressure crude oil prices.

 

Though crude prices could get supported by threat of production cuts as prices fall and geo-political risks, underlying trend remains bearish for crudeoil futures in the coming year.

 

International Price range:  $ 85- $105 /bbl ( NYMEX WTI crude)

 

Domestic price range: 5,500- 6,300 ( MCX )

 

BASE METALS

 

Base-metal struggled in a year where international growth slowed and there were fears supply would outpace demand.  As the global economy is probably recovering slowly in 2014, base metals could come back in flavour. Economic data should provide cues to copper prices as the metal is widely used in electronics, electrical products, automotive production, construction and general manufacturing and is highly sensitive to shifts in international economic growth. 

 

Attention is also on the approaching Indonesian ore export ban, a huge supply risk event in the horizon. This will affect copper, nickel and zinc to some extent. China's investment in the power grid rose 6% yoy, further underpinning base metal prices and copper in particular. The IMF raised its forecast for global growth to 3.6% in 2014 compared to 2.9% growth in 2013. United States is likely to grow 2.5% in 2014 from 1.5% in 2013 citing continued strength in private demand, which is supported by a recovering housing market and rising household wealth, the IMF data showed. Euro-zone region is expected to gradually pull out of recession, with growth reaching 1% in 2014.  Strong import demand from China and falling inventories are likely to keep demand for copper upbeat and is also likely to support prices going in to 2014. In 2014, the world usage of copper is expected to grow by around 4.5% in 2014 with world-ex-China expected to grow by 2.5% next year, data from the International Copper Study Croup (ICSG) showed.

 

In summary, we expect copper and other base metals to outperform the commodity complex in 2014, with potential risk in the form of a return of possible Euro Zone recession and the US economic recovery running out of steam.

Source: Economic Times

 

 

Baosteel opts for markups in weak market

Supported by sufficient demand from downstream industries, the nation's leading steelmaker Baoshan Iron and Steel Co Ltd (Baosteel) has raised the ex-factory prices for its February mainstay products by between 50 yuan (8.27 U.S. dollars) to 150 yuan per ton.

 

This is the second month in a row the Shanghai-based steel mill has lifted prices. Before the two-month streak of gains, Baosteel had kept the prices of major products unchanged for three consecutive months.

 

Analysts said Baosteel adjusted up its prices as a result of sufficient new orders from downstream industries, such as car-sheet demand from the auto industry.

 

In 2013, the auto industry outperformed other fields and maintained a stable demand for steel products used in car-making, which supported the price rise, said Yang Hua, a research manager with My-steel.com, a steel market information provider.

 

More than 20 million automobiles were produced and sold throughout 2013, a new record for both global and Chinese markets, according to the latest data from the China Association of Automobile Manufacturers.

 

"Baosteel's direct sales model is another factor in securing the steelmakers profit," said Wang Guoqing, deputy director of the Lange Steel Information Research Center.

 

According to Wang, between 70 and 80 percent of the mill's orders came directly from its downstream industries' clients, helping the company to maximize its profit margin by avoiding extra sales costs.

 

Baosteel has an efficient tailor-made supply service and high product quality, unparalleled across the nation's steel makers, added Wang.

 

Since its first processing and delivery center was set up in the late 1990s, there have been more than 30 similar centers in operation across the nation.

 

With such services, downstream companies such as automobile firms, home electric appliance makers and shipbuilders can place special demands for steel products.

 

Apart from its own product strengths, rising costs of the raw materials are also blamed for the latest price hike.

 

Analysts said domestic steel companies are still struggling to strike a balance, but as many as 40 percent of them are expected to report losses in 2013.

 

Unlike Baosteel, Jiangsu Zhangjiagang-based Shagang Group lowered its ex-factory prices of steel products for February delivery for the third month in a row.

 

"More than 50 percent of Shagang's products are construction steel, which means its demand is easily affected by the macroeconomy and demand circle," said Wang.

 

Although the nation's 86 major steelmakers' average sales margin is expected to be higher than the 0.04 percent of 2012, analysts said most of them will still operate on low profit margins because downstream demand is constantly declining year-on-year.

 

The sales margins of the nation's major steelmakers averaged 0.48 percent in the first 10 months of 2013, according to the latest data from the China Iron and Steel Association. While the sales margin of steel companies was less than 1 percent in 2012, that figure had been above 2 percent and was as high as 8 percent in 2004.

 

"The only chance for a better profit outlook is a price drop in iron ore," added Yang.

Source: China Daily

 

 

Shanxi’s coal production rises

The total coal output in North China's Shanxi Province reached a record 960 million tons in 2013, up from 913 million tons a year earlier, the Xinhua News Agency reported Sunday.

 

Out of this total output, 620 million tons of coal were used outside the province.

 

The coal-rich province will continue to push forward mergers and acquisitions of coal miners this year, and encourage techno￢logy upgrades of coal mines to ensure the sustainable development of the coal industry, the report quoted Li Xiaopeng, governor of Shanxi, as saying.

 

China's total coal production increased slightly to 3.7 billion tons in 2013, while consumption stood at 3.61 billion tons, according to the China National Coal Association.

Source: Global Times

 

 

Indonesian ore ban likely to hurt China

The move has been opposed by both domestic and foreign miners resulting in lay-offs and strikes in the mining sector

 

With just months to go for general elections, Indonesia’s outgoing President Susilo Bambang Yudhoyono has taken one of his tenure’s most significant economic policy decisions, by banning exports of unprocessed mineral ore. The impact of this decision will roil global industries from aluminium to steel manufacturing.

 

Indonesia is the world’s largest exporter of nickel ore, refined tin and thermal coal, and home to the fifth-largest copper mine and the top gold mine. Mineral shipments totalled $10.4 billion in 2012 according to the World Bank. Not all minerals will be equally affected by the ban however, and certain, primarily American, mining corporations, have been granted exemptions as well.

 

The reasoning behind the ban lies in an attempt to boost the domestic processing industries, by mandating that ores are processed locally before being exported. Despite having seen an average of 6 percent growth in recent years, Indonesia’s remains a largely commodities-driven economy and policy-makers are keen to try and kick start more high-value added, local manufacturing.

 

However, the move has been opposed by both domestic and foreign miners resulting in lay-offs and strikes in the mining sector. Officials are also worried that a short-term cut in foreign revenue could widen the current account deficit, which could further put pressure on the already battered, rupiah, the country’s currency.

 

Companies that build local smelters and process the ore domestically will still be allowed to export their products. However, the hundreds of small domestic miners that cannot afford to build a smelter, which can cost hundreds of millions of dollars, will be adversely impacted.

New regulation

 

President Yudhoyono has now signed a regulation that waters down the export ban somewhat, largely to accommodate the demands of American mining giant Freeport.

 

Freeport, which holds a 73 percent market share in Indonesia’s copper production, warned last month that unless the ban was revised, it would reduce output at one of its mines by 60 percent and also be forced to lay off half of its 15,000 Indonesian employees.

 

Under the regulation, Freeport and Newmont Mining, would still be allowed to export copper, manganese, lead, zinc and iron ore concentrate until 2017, by when they must build smelters to process the ore locally. But nickel ore and bauxite exports worth more than $2 billion annually will be banned.

Good news for India

 

Coal and tin shipments will not be affected. This is good news for India, since Indonesia supplied 75 percent of Indian imports of thermal coal in 2013.

 

Worst hit by the ban will probably be China. China imports close to a quarter of its bauxite – a raw ingredient for the production of aluminium — from Indonesia, and may force China to curtail some of its refining and smelting capacity. Again, halting exports of nickel ore would hurt the Chinese stainless steel industry, which accounts for almost 50% of the global output.

Source: The Hindu Business Line

 

 

Iron ore hits six-month low on lackluster Chinese demand

Iron ore slid to six-month lows and is on course for a second week of losses amid a sluggish steel market in top consumer China and as buyers remained scarce on expectations of a further decline in prices.

 

It has been a frail start to the year for iron ore – the biggest moneymaker for top miners Vale, Rio Tinto and BHP Billiton - with prices down more than 4 percent this month and there may be further downside risk as more supply comes through and growth in Chinese demand slows.

 

Shanghai steel futures dropped as much as 1.1 percent on Friday, trading near a record low, and are set to extend their losing streak to a sixth week in a row, their longest downturn since September.

 

"Buyers are not confident about the market so we're not seeing interest because they would rather wait and see while prices fall further," said an iron ore trader in Shanghai.

 

Buyers are unlikely to return until after the Lunar New Year break that starts at the end of January, he said.

 

Benchmark 62 percent grade iron ore for immediate delivery to China .IO62-CNI=SI dropped 1 percent to $128.30 a tonne on Thursday, its lowest since July 15, according to data compiler Steel Index.

 

Iron ore has fallen 1.8 percent for the week, putting its January loss at 4.4 percent.

 

"With market speculation of a further fall in prices, Chinese mills are only purchasing for immediate need rather than building up inventories," Australia and New Zealand Banking Group said in a note.

 

Stockpiles of imported iron ore at major Chinese ports stood at 89.5 million tonnes as of last week SH-TOT-IRONINV, the highest since November 2012, based on data from Chinese consultancy Steelhome.

 

The hefty port inventories followed recent strong imports by China which hit a monthly record of 77.8 million tonnes in November. Traders say tighter cashflow is also keeping mills from buying iron ore from the ports which they need to settle in cash.

 

 

"Steel prices are falling and a lot of the mills are losing money at the moment, probably 100-150 yuan ($17-$25) per tonne on average. It would be difficult for banks to lend to mills who they know are losing money," said the Shanghai trader.

 

The most briskly traded rebar contract for May delivery on the Shanghai Futures Exchange dropped to as low as 3,452 yuan on Friday, not far off a record trough of 3,441 yuan reached a week ago.

 

Rebar was down 0.2 percent for the week, heading for a sixth weekly fall.

 

Iron ore for May delivery on the Dalian Commodity Exchange  was off 0.7 percent at 873 yuan a tonne, after slipping to a session low of 870 yuan.

 

The contract is down about half a percent for the week after the price touched a contract low of 866 yuan on Tuesday, en route for a seventh weekly drop. Since its launch on Oct. 18, Dalian iron ore has only risen for two weeks.   

Source: Reuters (Editing by Muralikumar Anantharaman)

 

 

Supply and demand hammer at price of iron ore

China Daily reported that the price of iron ore is predicted to drop this year as growth of China's steel production slows and the supply of raw materials from international mining giants increases, according to industry experts.

 

An estimate from UBS AG earlier this month said the average price of iron ore would decline from USD 120 per tonne in 2013 to USD 110 per tonne this year, an 8.33% YoY decrease.

 

Mr Tom Price commodity analyst with UBS said that prices will fall due to global seasonal steel production declines, as well as larger iron ore exports from Australia.

 

Taking into account China's macroeconomic adjustments, it is widely agreed the country's steel output and production capacity will slow as the central government targets steady growth in the future.

 

In order to reduce emissions and deal with air pollution, the State Council, China's cabinet, has created a series of strict policies to cut overcapacity, which will contribute to slower steel production in 2014.

 

China plans to reduce steel production by 80 million tonnes within five years, which is aimed at easing the current severe overcapacity in the domestic steel industry and reducing carbon emissions.

 

Mr Xu Lejiang head of the China Iron and Steel Association said that China's crude steel output will total 810 million tonnes in 2014 up 4.5% compared with estimated overall steel output for 2013.

Source: Reuters

 

 

 

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