ANZ Commodity Weekly What relief package? Market drivers this week 11 November 2008 y Base metals should fall despite the release of the Chinese stimulus package over the weekend. The initial euphoria is giving way to caution that Inside: the large infrastructure-based initiatives will be lagged (into 2010) - and Market drivers...........................1 would have already been partly priced-in weeks earlier when major metal Wrap and outlook ......................2 production cutbacks were announced. The timing of the package could also be flagging (trying to offset) potentially weak China data out this week. CFTC data ................................4 Commodity news.......................5 y Gold could again be choppy, but the risks remain on the downside, with Price tables ..............................6 sentiment remaining generally weak. More influence will come from the oil Forward curves .........................8 price after a more exceptional week last week with US elections and large European rate cuts influencing price. The equity market appears to be Moving averages .......................9 giving mixed signals, but a slightly easing VIX index (option volatility on the Economic calendar...................10 S&P500) could give a lower incentive for safe-haven buying. A rising trend Forecasts table .......................11 in CFTC gold shorts could be repeated this week, triggering lower prices. Contacts ................................12 y Oil price should fall as growing concerns about demand offsetting the view that prices had fallen far enough. Falling OPEC supply is being largely ignored, while the more sensitive demand outlook has been further downgraded by the well-watched IEA. The Chinese stimulus package hardly registered, suggesting oil remains a US demand story. Accordingly, the weekly DOE numbers will be closely watched. Authors: y Coal prices should fall tracking lower oil prices. Buying interest appears Mark Pervan Senior Commodity Strategist to be picking up in Asian markets, but probably reflects a switch away from +61 3 9273 3716 higher price Chinese coal to lower price Indonesian and Australian coals. [email protected] Clouding that view is lower shipments and a smaller shipping queue at Newcastle, suggesting a drop in demand. Reports that European buyers are sidelined to see the impact that global recession will have on prices Natalie Robertson confirms this view. Graduate Analyst +61 3 9273 3716 [email protected] Figure 1: % price performance for the week ending 7 November 2008 10.4 Tin 3.8 Platinum 3.2 Coal 2.1 Silver 1.7 Gold (2.9) Zinc (4.2) Aluminium (9.0) Copper (9.4) Nickel (9.9) Lead (10.0) Oil (15) (10) (5) 0 5 10 15 Weekly % change Source: Bloomberg, globalCOAL ANZ Commodity Weekly - 11 November 2008 Wrap and outlook Base metals Base metals were mainly weaker last week with large increases in LME supply and weak Chinese data offsetting a choppy USD. The mood started on the back foot, with the release of disappointing China manufacturing data - measured by the CLSA Manufacturing Purchasing Managers Index – which fell further below 50 for the second month in a row signaling contracting commodity demand. A large jump in LME copper supply, mainly in European warehouses dragged copper prices 9% lower – offsetting the 8.5% gain the week before. Tin was the only positive performer, up 10.4% after LME supply fell a stunning 18.6% to a two and a half year low. China’s stimulus package Base metals should fall despite the release of the significant US$586b Chinese loses its impact stimulus package over the weekend. The initial euphoria is giving way to caution that the large infrastructure-based initiatives will likely be lagged (into 2010) - and would have already been partly priced-in weeks earlier when major metal production cutbacks were being announced. The early timing of the stimulus package could also be flagging (trying to offset) potentially weak China economic data out this week. The sharp increases in LME (copper) supply are also a signal that global demand conditions will continue to disappoint. Prices over the coming months are likely to ease, with weakening demand conditions dictating sentiment. Major leading economic indicators are pointing downwards, metal consumers are slowing for summer holidays and Chinese demand may ease post the Olympics. The USD looks choppy, but has set an upward trend in the last three months. Limiting some of the downside will be the already sharp falls in prices over the last three months - and in nickel, lead and zinc - prices bumping along the top-end of the curve cost. Precious metals Precious metals rose last week in a choppy trading range. In fact it was a tough week to gauge sentiment with a number of drivers moving in opposite directions – not least a US election and soft US payroll data and European rate cuts. Underlying this, gold prices held up relatively well with another sharp drop in oil prices and a mildly firmer USD normally triggering gold selling. Platinum was the best performer, up 3.8% on, with the market increasingly looking for a bottom, after precipitous falls over the past three months. Risks remain on the downside Gold could again be choppy this week, but the risks remain on the downside, with sentiment remaining generally weak. More influence will come from the oil price after a more exceptional week last week with US elections and large European rate cuts influencing price. The equity market appears to be giving mixed signals, but a slightly easing VIX index (option volatility on the S&P500) could give a lower incentive for safe-haven buying. A rising trend in CFTC gold shorts could also be repeated this week, triggering lower prices. We expect gold prices to be choppy to lower in the coming months although concerns of further financial fallouts could trigger some short term rallies. Falling oil prices and a firming USD will continue to weigh on prices, while the possibility of a recovery in equity markets should take a major support out of the gold price. However, the record high VIX index will continue to support safe-haven flows. Holding back further falls will be a seasonal pickup in Indian demand (for the fourth quarter wedding season). Page 2 ANZ Commodity Weekly - 11 November 2008 Oil Oil dropped sharply again last week, the fourth time in 6 weeks that we have seen oil prices slide 10% or more. Weak US ISM data, with factory activity falling to a 26-year low and negative IMF global growth and oil predictions (2009 down to US$68/bbls from US$100/bbls) heightened energy demand concerns. Another bearish weekly DOE (Department of Energy) report fuelled selling, with US gasoline stocks climbing last week amidst falling demand. Global demand fears outweighed reports of OPEC countries complying with agreed monthly oil supply cuts. Oil price should fall this week as growing concerns about demand offsetting the Falling OPEC supply is being view that prices had fallen far enough. Falling OPEC supply is being largely ignored ignored, while the more sensitive demand outlook has been further downgraded by the well-watched IEA. The Chinese stimulus package hardly registered, suggesting oil remains a US demand story. Accordingly, the weekly DOE numbers will be closely watched. Prices over the coming months look vulnerable to a further weakness, as sentiment continues to plummet on a weakening demand backdrop. The latest US financial fallout has heightened concerns about US growth – which will affect oil the most – still being its’ largest end-user market (by far). We would expect OPEC to respond with production cutbacks in the near term. However, with prices still comfortably above the top end of the cost curve, and the focus clearly on demand conditions, tightening supply will unlikely create much price support. Coal Coal rose last week, despite weakening demand in Europe and China. Coal prices from Qinhuangdao underperformed, down 4.4% to US$129/t FOB on rising stockpiles (up 6% MoM to 8.8mt) and reports that power plants were amply supplied ahead of the winter season. News that Shanxi - China’s top coal producing province - is cutting coking coal production by 10%, also weighed on sentiment. On the flipside, thermal coal prices from Indonesia and Newcastle were buoyed on buying interest from Asian utilities. Indonesian prices were additionally supported on predictions by the national electricity firm that three new power plants would require 40mt of coal in 2009, up from 35mt this year. Coal prices should fall this week tracking lower oil prices. Buying interest Buying interest picks up in appears to be picking up in Asian markets, but probably reflects a switch away Asian markets from higher price Chinese coal to lower price Indonesian and Australian coals. Clouding that view is lower shipments and a smaller shipping queue at Newcastle, suggesting a drop in demand. Reports that European buyers are sidelined to see the impact that global recession will have on prices confirms this view. Increased Russian rail-car availability could also increase supply at a time when demand is waning. Prices over the coming months should ease, in line with our lower forecast oil price. Global demand conditions also appear to be faltering – more so in Europe than in Asia. However, ongoing infrastructure constraints in Australia, the likelihood of lower exports out of China (potentially Vietnam and South Africa), and seasonally wet weather in Indonesia, is likely slow the price decline. The switching of higher quality thermal coal into the higher priced semi-soft coal market should continue with price differentials widening further. Sharply falling freight rates are a warning sign that demand has fallen, although reports suggest that some of the weakness is due to tightened financing conditions. Page 3 ANZ Commodity Weekly - 11 November 2008 CFTC data y Copper longs and shorts covered on a negative global demand outlook as copper stocks continued to increase.