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April 25, 2008
Disclaimer -
The information published in this document has been obtained from public sources believed to be reliable. BNP Paribas does
not make any representation or warranty, express or implied, in connection with the accuracy of the opinions or statements
contained herein. The information provided by this document is only indicative, not to be relied upon as substitution for the
exercise of judgment by any recipient, and subject to change without notice. BNP Paribas shall not accept any liability
whatsoever for any direct or consequential loss arising from any use of material contained in this document.
This document is not intended as, and does not constitute, an offer or a solicitation to buy or sell any instrument or to enter
into any transaction. Any reference to past performance should not be taken as an indication of future performance. This
document should not be reproduced (in whole or in part) without BNP Paribas’ written consent.
© BNP Paribas (2003). All rights reserved.
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The Markets at a Glance -
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Energy - Crude Oil
“Peak oil” or peak prices?
WTI initially drifted lower and tested the US$100/bbl support level in early April, only to shoot up and reach a record US$120/bbl on April 22nd. On the next day, prices eased slightly to US$117/bbl due to a stronger US dollar. Brent witnessed very similar price movement, ending at US$115/bbl.
The WTI-Brent spread, meanwhile, reached a 6 month high at more than US$5/bbl. It then dropped back to US$2.5/bbl, with Brent getting support from an impending strike at the Grangemouth refinery in Scotland. As a result of the strike, the Forties pipeline will be shut, affecting about 700,000bbl/day or half of UK crude oil output.
US stocks data has been ambiguous since our last publication. US crude stocks increased by a net 4.1mb from March 21st to April 18th, reaching 316.1mb. Stocks remain roughly in line with the 5 year average and so far the data points to a normal build-up in crude inventories ahead of summer. However, the increase in crude stocks was facilitated by abnormally low refinery utilization rates: they dropped to 81.4% in the middle of April, the lowest level since Hurricane Katrina. Like last month, maintenance as well as weak refining margins contributed to further production cuts. This is probably about to change with the US driving season fast approaching and the end of the refinery maintenance period. Actually, refinery utilization rates jumped back to 85.6% at the end of April. The weather-related closure of four Mexican export terminals could also drive US crude stocks lower in the near future.
The distillates market, on the other hand, gave a clearer bullish signal: US stocks plunged to 3 year lows amid refinery outages in Europe and North America, as well as signs that emerging markets demand is surging. Chinese diesel imports, for instance, increased by 49% from February to March due to increased demand for power generation. However, it is safe to say that US distillate stocks have reached a bottom, with winter season quickly fading away.
Meanwhile, the crude oil market was constantly reminded of supply tightness both in the short term and the long term. In Nigeria, production continues to be affected by terrorist acts: on the 21st, Shell declared force majeure at the Bonny terminal and closed 169,000bbl/day of production after attacks from militants. Also in Nigeria, workers went on strike at Exxon Mobil’s Qua Iboe export terminal a few days later.
Looking out to the medium to long term, the market was spooked by news that Russian oil production in Q1 had fallen 7% yoy for the first time since 1999. Additional remarks by Lukoil’s vice-president – that last year’s Russian oil production of 10mb/day was the highest he’d ever see – further dampened the mood. Last year, the IEA had forecast a rise of about 5% in Russian production from 2007 to 2012.
News that a huge oilfield has been discovered off Brazil’s coast could be seen as bearish, but the oil sits under 2km of water and another 2km of rock, making it very expensive to extract. Besides, it may take several years until the oilfield is commercially exploited.
News from the OPEC side was also bullish. The IEA estimates that OPEC production fell by about 350,000bbl/day from January to March in order to match a seasonal drop in demand. The cartel’s next scheduled meeting is in September and so far there are no signs that it will consider raising production quotas. If anything, recent remarks by Saudi and Libyan officials point to a lack of spare capacity even within OPEC.
Surprisingly, WTI’s recent 20% rise doesn’t seem to have been matched by an equally spectacular increase in speculative positions. CFTC data from March 25th to April 15th for WTI futures does show an increase in non-commercial length as a percentage of open interest, from 3.95% to 4.62%. However, this remains well below the 8.38% peak seen last summer or even 7.63% in early March.
Crude oil could be due for a short term correction if the US dollar strengthens and signs of a slowdown in demand growth appear more clearly on the physical market. The IEA has yet again downgraded its forecast for 2008 demand to 87.23mbbl/day, now down by a full 1mbbl/day since last year’s initial forecasts. The IMF’s pessimistic new outlook for OECD growth was given as the main reason for the revision.
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Energy - European Refining Margins
Better hold on in these roller-coaster times
During the past four weeks, refining margins have been dramatically volatile, skyrocketing to their highest since May07 before sloping back sharply as from April 10th. Our NWE Brent cracking gross margin indicator has varied from USD 6.6 on March 28th up to USD 8.3/bbl on April 10th and back to USD 5.4/bbl on April 25th. Our Urals cracking gross margin indicator followed the same path albeit a little bit smoother, varying from USD 4.6/bbl to USD 5.4/bbl and USD 3.6/bbl. At the same time, our NWE Brent hydroskimming indicator hit all time highs, soaring from USD 3.6/bbl to a stellar USD 6.3/bbl before plunging back to USD 1.7/bbl. Despite some relief around the 10th of April, our Urals hydroskimming margin indicator sank back deep in negative territory, varying from USD -1.3/bbl to -0.2/bbl USD and to USD -3.6/bbl.
During the first part of April, NWE refining margins were mainly driven by erratic diesel prices, surging to all time records on April 10. They eased down subsequently but light distillate markets remained supportive enough to enable Diesel crack spreads to hold firm despite soaring crude oil prices. In this regard, fuel oil markets proved much less successful and their crack spreads shrank once again towards the abysses, thus causing hydroskimming gross margins to sharply plunge as from April 18.
The refining margins have been firmly supported by low distillate and still plummeting gasoline stocks in the US, despite record-breaking crude oil prices. Until recently, US refineries have been run at surprisingly weak utilization rates (close to 80%) for this time of the year. During the past few weeks, they should have come back progressively to operations to get prepared for the starting driving season. With a soaring apparent demand for gasoline and diesel, this low activity causes stocks to drop, thus giving a lift to product prices. In a context of rising product prices, a couple of days ahead of the start-up of the US driving season, one should see the US refinery activity edge back up to more normal levels.
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Energy - US Natural Gas
No relief in view
Over the period March 28th, 2007 (date of our last publication) to April 24th, 2008 Henry Hub gas prices have evolved in a range included between a maximum of US$ 10.47 /MMBtu (on April 21st) and a minimum of US$ 9.03/MMBtu (on April 1st), for an average price of US$ 9.91/MMBtu (31% higher than the average price of US$ 7.59/MMBtu over the same period in 2007).
Since the beginning of the year 2008, the average price has been equal to US$ 8.89/MMBtu, 22% higher than the corresponding period of 2007 (and 17% higher than in 2006).
Supported by supply difficulties, Henry Hub spot prices kept moving upwards and crossed the US$ 10/MMBtu on April 10th, which is exceptional for the season. Indeed, Canadian production kept on declining while the 1 Bcf/d production of the Independence Hub stopped because of a gas leak (expected to last a couple of weeks at least). LNG imports remained low. Moreover, record oil prices led a general bullish trend.
Compared to last month’s data, the Nymex futures curve moved up by more than US$1/MMBtu to average US$11.07/MMBtu over the next 6 months.
The May contract entered the month at US$9.72/MMBtu with a slight weakening to US$9.32/MMBtu as of April 4th, then it steadily moved up to US$10.78/MMBtu as of April 23rd. Futures contracts were supported by the rally of crude oil and gasoline futures, as unexpected declines in US crude oil inventories and refinery operating rates were announced. Notice that January and February 2009 contracts have already crossed the US$12/MMBtu threshold.
Working gas in storage was 1,285 Bcf as of April 18, 2008, according to EIA estimates, 274 Bcf less than last year at this time and just 25 Bcf above the 5-year average of 1,244 Bcf.
The injection season began in early April with a starting level of 1,234 Bcf as of April 4th.
US drilling activity remained relatively flat, in April, evolving in the 1,450-1,460 range and reaching 1,451 active rigs as of April 11th. Canadian drilling activity went on the usual seasonal fall down to 82 active rigs as of April 22nd. This is quite low, but still 17 units above last year's level at the same date.
According to preliminary data, LNG imports remained very low in March (24.8 Bcf vs. 86.8 Bcf in March 2007) but might have increased in April, as new re-gasification terminals (Freeport and Sabine Pass) received their first commissioning cargoes.
Despite the fact that domestic production is rising significantly thanks to unconventional sources (it is expected to increase by 3% in 2008), a number of financial and fundamental factors continues to support spot prices. The dollar's weakness stimulates commodity investments in a context of rising demand from emerging countries, while supply outages at the Independence hub and declining Canadian and LNG imports put under question the capacity to re-build a comfortable storage surplus for the beginning of the winter season. In such a context, US natural gas prices are unlikely to correct significantly even during the shoulder period. We expect them to continue to evolve in a 9-11 US$/MMBtu over the coming weeks.
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Energy - Emissions
Oil continues to spill over the EUA markets
European Trading Scheme
In April, EUAs saw their third bullish month in a raw, hitting the psychological cap of 25€ on April 15, for the first time since the end of May 07 for the DEC08 vintage. Then, EUAs break it through a second time on April 21 prior to sloping back to 24.5 € on April 24. Unsurprisingly, crude oil is broadly accused to have sparked the blast of the whole energy complex, including EUAs. From the end of March to mid-April, EUA prices showed quite good correlation with Brent prices, when expressed in euros. However, following the wise man’s adage “trees do not grow to the sky” - especially when watered with crude oil, EUA markets proved reluctant to catch up with oil when they hit the 25€ mark. Since then, oil market movements have still impacted EUA prices but the latter remain stuck to 25€.
The forward curve edged up in an almost parallel shift during April. Arbitrage opportunities appeared again along the curve.
Regulatory Context and Carbon Balance
At the very beginning of April, the European Commission unveiled the aggregated position of all of the EU ETS installations that have submitted their annual emission report. In 2007, CO2 emissions within the EU ETS exceeded those of 2006 by 1%. The news was paid relatively poor attention for the market has looked away from Phase 1 for long.
CERs and ERUs markets
Primary market prices for CERs seem to have remained flat over last month, as shown by the SW Credit Note. More interestingly, the peg between secondary CER prices and EUAs has completely collapsed as CERs failed to keep pace with the sharp rise of EUA markets: ignoring the bouts of fever of the energy markets, secondary CERs have continued to hover close to the 16€ mark.
Another piece of news that deserves being pointed out: Russia was the fourth country to successfully connect its registry to the UN electronic log (following Japan, New Zealand and Switzerland). The next step for Russia before being authorised to trade Kyoto credits is to be awarded eligibility by the UNFCCC. This may materialise at the beginning of the summer.
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Energy - Coal
All eyes on the Pacific market
CIF ARA thermal coal initially slumped to less than US$130/tonne in early April, before recovering close to February peaks around US$150/tonne.
Most of the recent upswing in CIF ARA prices was related to developments in the Pacific market. Indeed, European utilities are said to hold reasonable stocks of coal and demand is not expected to increase in the near future as temperatures increase in the Old Continent. Coal stocks at Rotterdam have been stable at around 1.7mt, showing no signs of tightness.
However, the widening premium of Newcastle relative to Richards Bay meant that Richards Bay FOB prices had to start moving back up sooner or later. On April 7th, the premium stood at US$15/tonne, compared to just US$10/tonne one week earlier. Therefore, Richards Bay prices moved back up from a slump that had taken them close to the US$100/tonne level and attained US$111/tonne on April 21st.
There doesn’t seem to be any particular tightness at Richards Bay, however the market reacted bullishly to the new thermal coal contract prices for 2008. Xstrata signed a US$125/tonne deal with Japanese utility Chubu, which took the market by surprise considering spot Newcastle prices are at the same level and last year’s contract prices were 50% lower. More expensive Australian coal is expected to divert some Asian demand to Richards Bay.
Freight rates have increased since our last release, with the Baltic Dry Index moving more than 10% up to 9,182 points on April 24th.
Coking coal contract prices were even more surprising than thermal coal: BHP Billiton – Mitsubishi Alliance secured a US$305/tonne deal with Arcelor-Mittal and a flurry of US$300/tonne deals with Asian customers such as Nippon Steel, POSCO and JFE. The new contract prices are over 200% above last year’s. This year’s floods in Queensland, which tightened the spot coking coal market dramatically, are said to have played a large part in the massive price increases.
In China, power shortages are prompting the coal industry to produce more thermal coal at the expense of coking coal, which will probably exacerbate tightness on an already tight market.
In both thermal coal and coking coal contracts, those customers who were clever or lucky enough to secure deals late last year must be sighing with relief: Korean utilities for instance agreed to pay around US$65-68/tonne for thermal coal in FY 2008. As for coking coal, some US producers are said to have settled contract prices of around US$150/tonne late last year.
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Energy - European Power
“Shoulder month” theory put to the test
April is typically considered a “shoulder month” for power markets in Europe, with temperatures neither too cold nor too hot to cause demand spikes. As a result, supply margins are generally ample during this period and plant maintenance season can safely move into full swing. This year, however, European power prices moved up in April instead of trending down and were actually higher than at most points in the “head months” of January and February. Volatility also picked up, as well as peakload-baseload spreads.
April 2008 prices look even more expensive when compared to previous years, with the average baseload price in the UK, France and Germany between 130% and 190% higher than last year and 40-80% higher than in 2006. Temperatures below seasonal averages, combined with a mixture of planned and unplanned outages meant supply margins remained tight and made April look like a very high shoulder indeed.
In Germany, exceptionally low wind capacity – below 1GW and even 500MW on certain days – put pressure on supply margins in the first half of the month, coupled with a few very cold spells and unplanned outages in coal-fired generators. Besides, the German market reacted to bullish news from the French supply grid. EEX traded at a discount to Powernext throughout the month.
The French system was hit by nuclear outages, some planned, some unplanned. Nuclear availability was pegged at 74% at the end of April, the lowest level so far this year and down from about 82% at the start of the month. Combined with cold spells, the French system provided the entire market with bullish impetus, particularly in the first half of the month.
UK prompt markets initially followed their continental counterparts upwards and were given a lift themselves by higher NBP gas prices and tight availability. Supply margins dipped around 2,000MW at the start of April, which is very tight – anything under 5,000MW is generally considered tight.
The market will keep looking anxiously at the nuclear situation in France, where EDF recently announced that up to 5 of its nuclear reactors will remain offline for longer than expected because of technical problems. If temperatures soar during the summer months, tight supply margins in France might prevent seasonal exports to Germany.
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Metals - Non-Ferrous Metals \ Alumina
Chinese alumina prices recovering
International alumina prices are at US$410/tonne, US$5/tonne higher than last month, while on the Chinese market the price bottomed out at RMB3,475/tonne in the first half of April before recovering slightly to RMB3,575/tonne.
The slight increase in Chinese prices had been anticipated by market players in early April: aluminum smelters in Southern China are ramping up production again, which increases demand. It is estimated that by the end of this month, most major primary aluminum producers in China will be able to operate at 100% again. Besides, considering the dramatic increases seen in raw materials such as bauxite and energy, some aluminum producers are eager to secure alumina supplies at current prices before they start rising due to higher costs.
On the international market, we were surprised that Nalco’s latest tender went to trading firm Trafigura Beheer at US$427.77/tonne FOB Vizag. This is significantly higher than the US$390/tonne transaction with Glencore in late March, and may signal a tightening of global market conditions.
However, we still expect international prices to ease considering the world market looks set to end the year in a surplus of about 1mt and hasn’t seen a deficit since 2005.
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Metals - Non-Ferrous Metals \ Aluminum
No news, good news?
Cash aluminum on the LME has rebounded above US$3,000/tonne, hitting US$3,025/tonne on April 24th. The 3mth-cash spread has remained mostly stable since our last release around US$50/tonne.
There was little news in April to get the aluminum market going. Investor focus remains on rising producer costs, particularly energy, and possibly power shortages in certain parts of the world. These underlying concerns offer strong support to the back end of the aluminum curve, but in the absence of a short term supply squeeze cash prices above US$3,000/tonne do not look justified to us.
LME inventories haven’t moved much since the end of March, going from 1,031,550 tonnes on March 28th to 1,038,850 tonnes on April 24th. We estimate that LME, Comex and SHFE stocks together currently represent about 1.6 weeks of cover, which is very little by historical standards but above February levels of 1.3 weeks.
Data from China’s National Bureau of Statistics was bearish: Q1 production of primary aluminum increased by over 10% yoy to 3.1mt, and a 20% increase would have been likely if snowstorms hadn’t resulted in an estimated loss of 350,000 tonnes. Chinese exports of primary aluminum and aluminum alloy also posted a strong increase, rising 53% to 80,600 tonnes. Both sets of data are surprising considering China is supposedly attempting to curb production and exports of energy-intensive products such as aluminum. Most forecasts anticipate a balanced aluminum market in 2008, but in doing so take into account a slowdown in Chinese production and export growth.
Aluminum premiums are sluggish in Europe, with the 3mth duty paid premium at US$110-115/tonne as opposed to US$115-125/tonne at the end of March. Traders report no shortage of material and a feeling that the surge in LME prices is not reflective of the current supply/demand situation on the Old Continent. In the US, premiums have been holding steady at USc4.5-5/lb thanks to a shortage of scrap and in spite of a weakening demand.
While robust demand growth from China and rising costs remain supportive of aluminum prices in the medium to long term, we believe cash prices should correct considering the short term situation.
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Metals - Non-Ferrous Metals \ Copper
A traditional bullish cocktail of strikes and low inventories
Cash copper on the LME hit yet another all-time high in April, settling at US$8,884/tonne on April 10th and spurring talk of copper prices reaching 5-digit figures. Since our last release, prices have been very resilient above the US$8,500/tonne level. The 3mth-cash premium has been volatile, with backwardation increasing above US$160/tonne on certain days before settling at US$100/tonne on April 23rd.
The rate of decline of LME stocks has slowed down significantly, with inventories dropping only 2.5% since our last publication. They stood at 112,200 tonnes on April 24th. However, LME inventories only represent 2 days worth of global consumption, which is a record low level and makes prices extremely sensitive to supply-side disruptions. The low level of stocks has put further upward pressure on European copper premiums, which have risen about US$20/tonne since last month to US$90-115/tonne. US premiums have also increased.
There was plenty of supply-side news in April. The main story came from Chile, with Codelco workers starting a strike in the middle of the month, affecting roughly 300,000 tpy of mining capacity at the Andina, El Teniente and Salvador divisions. This represents roughly 2% of world mined production. In Mexico, Grupo Mexico announced that resumption of full production at the Cananea mine in May may have to be delayed due to the ongoing strike. And in Indonesia, the head of the country’s mine inspection said Freeport-McMoRan may have to cap copper ore production at its Grasberg mine at 220,000 tonnes/day, down from 300,000 tonnes/day. Environmental damage was cited as the main reason for the potential ruling.
Chinese import figures for March are inconclusive. Imports of unwrought copper and semi-finished copper products increased 6% mom to 240,634 tonnes. However, most of this material was purchased a couple of months ago when LME prices were well below US$8,000/tonne.
On the medium-long term, the industry is paying increasingly attention to the power situation in Chile, which most analysts expect to remain very tight until at least 2010 or 2011. A drought and curtailment of gas supplies from Argentina are forcing power generators to switch to diesel, which is far more expensive. In the short term, Coldelco’s CEO believes power costs to his company will increase 75% in 2008.
Dramatically low inventories, rising costs and the possibility of lower than expected mined production due to strikes and other disruptions give strong support to copper prices. However, we believe fundamentals alone do not justify prices close to US$9,000/tonne. A resolution of the Codelco strike, which appears to be possible in the coming days, could serve as a catalyst to send prices sharply lower.
CFTC data for the period from March 25th to April 15th shows what looks like a stand-off between bulls and bears: long non-commercials increased from 23,000 to 30,000 lots, but so did shorts, from 15,000 to 21,000 lots. It will be interesting to see who wins the battle, but for the moment we stand on the bears’ side.
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Metals - Non-Ferrous Metals \ Lead
Lead lacking direction
Cash lead on the LME doesn’t seem to be going anywhere at the moment. The heavy metal has dropped 5% so far in April, from US$2,872/tonne at the date of our latest publication to US$2,740/tonne on April 21st. A high of US$2,952/tonne was reached respectively on April 1st. The 3mth-cash spread has been in contango on most days.
Supply-side issues kept lead buoyant in the early part of the month, with the main story being a 12 day strike at Doe Run Peru’s La Oroya complex. The La Oroya smelter complex produces copper, zinc and lead, with a capacity of 120,000tpy. About 4,500 to 5,000 tonnes of lead are exported to the US each month. The strike was eventually declared illegal and workers returned to work, but it will reportedly take some time until production resumes fully.
In Australia, there is little news concerning Ivernia’s Magellan mine. Ivernia is still waiting for the Australian government’s official go-ahead in order to start exporting lead again. Meanwhile, Doe Run Peru has lost an Environmental Certification that it had received 2 years ago.
Concerning the broader supply/demand balance, LME inventories have risen a hefty 10% since the end of March to 54,750 tonnes, the highest level since October 2006. The accelerating rate of inventory build-ups had a bearish effect on prices at the end of the month. However, data from the ILZSG shows the lead market was in a deficit of 21,000 tonnes in February, after a 5,000 tonne deficit in January. Commercial stocks in February totaled only 2.6 weeks of world consumption. A balanced supply/demand equilibrium is expected for this year.
In industry news, Nyrstar has settled a lead TC contract at US$350/tonne with a basis LME price of US$2,500/tonne.
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Metals - Non-Ferrous Metals \ Nickel
Nickel still not going anywhere
Cash nickel on the LME has had a relatively uneventful month in terms of price movement, moving from US$29,802/tonne on March 31st to US$28,665/tonne on April 24th. The 3mth-cash spread has been equally dull, clinging to a contango of about US$200-400/tonne.
LME inventories gave a bearish signal, increasing about 4% to 51,978 tonnes. This represents more than 7 weeks of consumption, which is plenty, particularly when compared to other metals like copper or aluminum. However, stocks of ferronickel have reportedly decreased in recent weeks, with the month-long strike at the Cerro Matoso mine probably the main reason. Total production loss is estimated at approximately 5,000 tonnes of ferronickel.
The nickel industry is still anxiously looking for positive signs from the stainless steel industry. Stainless steel prices have certainly been increasing in Asia for instance, which could indicate that business is recovering from last year’s slump. Data from the International Nickel Study Group is also mildly supportive. It shows that the nickel market was in a 3,400 tonne surplus in the first two months of 2008, but the market was much tighter in February than in January. Meanwhile, CRU statistics indicate global stainless steel production in Q1 was down 2% yoy, but higher than in Q4 2007. It looks like demand from the stainless steel sector might only increase significantly later this quarter.
LME prices have thus surprisingly withstood an inventory rise to 10 year highs these last few months, as market players anticipate an impending decrease due to higher demand from stainless steel mills. However, we remain of the view that prices should eventually decrease to reflect ample supplies.
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Metals - Non-Ferrous Metals \ Tin
New records
Tin has broken more records since our latest release, hitting US$24,152/tonne on April 24th. This is more than 17% above the March 28th price and 47% above January levels. The 3mth-cash spread dipped as low as – US$275/tonne on April 14th but has since recovered close to 0. From a contango high of US$282/tonne last autumn, the 3mth forward curve does appear to be steadily sinking towards backwardation.
Supply side issues kept popping up in April, supporting prices at record levels. Indonesian officials from the country’s Ministry of Energy and Mineral Resources have suggested that the government may decide to cap annual tin exports at 100,000 tonnes. This would be above last year’s 85,000 tonnes but significantly below the 120,000 tonnes exported in 2006 and 2005 when illegal mining was rife. A decision should be taken in the next two months.
In Bolivia, a 12 day strike at the Huanuni mine disrupted production as workers demanded higher wages. Huanuni produced 7,669 tonnes of tin concentrate last year. Meanwhile, China, the largest tin producer in the world, remained a net importer of refined tin for the 6th consecutive month in March due to the prohibitive 10% export tax and strong domestic demand.
Signaling a tightening supply/demand situation, LME stocks keep drifting lower. They stood at 7,950 tonnes on April 24th, a 2 ½ year low. Premiums also signal a drop in metal availability: in Europe they have risen from US$320/tonne at the beginning of the year to US$370-400/tonne currently.
Although tin’s fundamentals are definitely supportive, recent price increases may have been a little overdone and we expect a correction soon.
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Metals - Non-Ferrous Metals \ Zinc
2006 highs a distant memory
Zinc was the worst performer on the base metals complex in April, dropping about US$100 to US$2,220/tonne on April 24th. The 3mth-cash spread has moved higher into contango, from about US$30/tonne at the end of last month to US$40/tonne now.
LME inventories are still rising, topping the 130,000 tonne mark in late April and reaching one and a half year highs. However, this only represents a few days’ worth of global consumption, and total commercial stocks don’t currently cover much more than 2 weeks, which is low. The zinc inventory situation is very similar to copper, but then why are prices slumping so badly?
Contrary to copper, there seems to be much less uncertainty on the zinc concentrate market this year, where production is forecast to increase by 10% from 2007 levels. Refined zinc production won’t increase this fast but will still allow for a hefty surplus on the refined market. Hence stocks seem destined to keep rising in the foreseeable future.
ILZSG data for February points to yet another monthly surplus of refined zinc at 8,000 tonnes. This figure is much lower than the January surplus of 40,000 tonnes but this can be accounted for by the snowstorms in China which reduced production there. The Chinese National Bureau of Statistics indicates an 18% mom rise in zinc production in March to 315,800 tonnes – also up 7% yoy – which seems to indicate that March will see a much larger surplus than February on world markets. Highlighting the surplus, Singapore premiums have recently dipped from US$50-60/tonne to US$30-50/tonne.
Meanwhile, miners and smelters appear to be wrapping up negotiations for TCs, with no clear industry benchmark. Teck Cominco settled a US$300/tonne TC with Korea Zinc, basis US$2,000/tonne with escalators between USc6-13/lb. Nyrstar, on the other hand, settled US$350/tonne basis US$2,500/tonne and apparently got as much as US$370/tonne out of smaller miners.
Unless production disappoints unexpectedly or the Chinese introduce an export tax, it is hard to see how prices could break out of a trading range below US$2,500/tonne. However, we should caution that commodity markets are no strangers to unexpected disruptions.
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Metals - Ferrous Metals \ Iron Ore
No Australian contract prices yet
Japanese fiscal year 2008 is now underway, yet Australian iron ore miners BHP Billiton and Rio Tinto have still not reached a price agreement with Chinese steelmakers. Negotiations are tough as the Australian miners are pushing for a freight premium to reflect closer proximity to Chinese ports, compared with Brazilian supplier Vale.
The Chinese are adamant about keeping FOB prices instead of CIF: many steel mills have already signed contracts of affreightment with shipping companies. Maybe the Australians will end up agreeing to FOB prices, but with a steeper increase than Vale’s 2008 benchmarks of +65% for Southern System fines and +71% for Carajás fines.
Rio Tinto and BHPB recently warned that they will put iron ore on the spot market if no agreement is reached by June 30th, but the Chinese answered back by saying they won’t buy spot Australian ore.
On the spot market things are relatively quiet: Indian offers to Chinese customers have eased to US$190-195/tonne CIF from over US$200/tonne in March. Trading has been thin, partly due to high inventory levels at Chinese ports. Over 60mt of iron ore is reportedly sitting in port warehouses. Besides, a number of smaller Chinese mills have had to reduce or even halt activity due to a lack of financing and surging coke and coking coal prices. Activity is expected to pick up later in Q2.
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Metals - Ferrous Metals \ Steel
Steel prices worldwide showing signs of peaking
The price for US HRC imports has moved up since our last publication, reaching US$1,010/short ton from US$830/short ton in late March. Import activity remains very thin, with March import licenses down 1.7% month-on-month. The ever weaker US dollar, combined with surging prices overseas and relatively high freight rates, is not attracting much material to the United States.
The export price for HRC made in the CIS is still at US$960/tonne, but there have been offers at and above the US$1,000/tonne mark. Russian and Ukrainian steel mills can’t keep pushing for price hikes as customers are getting increasingly aware of a widening price gap between Chinese and Russian material. There is more and more talk that this year’s period of massive price hikes may already be behind us.
That same price gap between CIS and Chinese origins is the chief reason for Chinese export prices finally crossing the US$900/tonne threshold to US$910/tonne. Chinese mills have become competitive and are challenging CIS dominance in import markets such as the EU and the Middle East. Chinese finished steel exports increased by 33.7% from February to March, reaching 4.16mt. In turn, this has given upward impetus to domestic prices which are now hovering around US$780/tonne in South China and US$770/tonne in East China.
In Turkey, the export price of debar has stayed firm since last month, increasing by US$30/tonne to US$990/tonne first before retreating to the US$980-985/tonne range. However, many offers have been made above US$1,000/tonne. Strong demand from Asian buyers, particularly in the Middle East, is still exerting a strong upwards pull on export prices. However, domestic rebar prices have weakened due to softer demand and have reportedly fallen to the same level as billet prices.
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Soft Commodities - Fibers \ Cotton
Should investors turn bearish?
Cotton futures in New York have traded sideways so far this month, easing from US¢71.68/lb on March 28th to around US¢70/lb in the first week of April, then climbing over US¢75/lb in mid-April before tracking back to US¢68.6/lb on April 24th.
CFTC data points to a slowdown in the reduction of net long non-commercial positions, which shrank from 30,000 lots on March 25th to just over 20,000 on April 8th, but then jumped back up to 27,000 lots on the 15th. The reason for the sudden bounce is that shorts decreased by over 10% to 35,000 lots, probably deciding to buy the dip. Longs, on the other hand, appear to have leveled off at around 60,000 lots for the time being.
There have been signs of physical demand for US cotton from Chinese buyers, even though prices remain above the US¢70/lb threshold. On the one hand, Chinese spinners need to replenish stocks but on the other hand, the renewed buying interest may have been a reaction to news that India is considering a 5% tax on cotton exports.
In the US, the USDA’s March 31st plantings report predicted a 13% drop in cotton plantings to 9.39 million acres, which would be the smallest planted area in 21 years. However, the news didn’t surprise the market, thus cotton prices ended up not going anywhere.
The USDA’s April report didn’t feature large revisions and was slightly on the bearish side if anything: world production for the current season is seen 832,000 480lb bales higher at almost 120m bales, due to revisions in the US and Indian figures. Besides, Chinese imports are seen slightly lower. World ending stocks are now forecast to reach 59.6m bales, about 1.6m bales lower than last season but still covering 50% of world demand, which is plenty compared to other commodities.
For this reason, and also considering that cotton is much more exposed to the global economic slowdown than other soft commodities, we believe that the 40% annual price increase is hard to justify.
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Soft Commodities - Fibers \ Pulp & Paper
Still no clear direction on pulp markets
Since our last release, BEKP pulp delivered to Western Europe has decreased further to 517euros/tonne, from a high of 540euros/tonne earlier this year. NBSK delivered to Western Europe is unchanged at US$880/tonne. March world pulp data was inconclusive, with bulls pointing to persistently high shipments while bears remind us of relatively high inventories.
World shipments increased by 4.2% yoy, bringing the year-to-date rise to a solid 6%. Once again, non-Japan Asia was the key driver, with shipments there soaring by more than 15% yoy, while they fell in North America (-5%) and barely moved in Western Europe (+1%). Like in previous months, shipment growth seems to be focused on hardwood due to both increasing demand and production, with an 11% increase yoy versus flat for softwood. The shipment/capacity ratio remains high but dropped 1 percentage point month-over-month to 93%, versus 95% one year ago.
Inventories dropped by approximately 40,000 tonnes in March. However, they remain near 3 ½ year highs and still represent 34 days of supply. A balanced market generally holds inventories worth 32 days of supply. Softwood inventories rose 2 days to 33 days, indicating that the softwood market is moving away from tightness, while hardwood inventories held flat at 36 days.
On the one hand, increased hardwood capacity in Latin America (Metsa-Botnia mill in Uruguay) is a bearish factor; however this could be compensated by restricted supply elsewhere. For instance, Scandinavian mills have recently announced production cuts due to the rising cost of Russian timber and a mild European winter.
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Soft Commodities - Grain and Oilseeds \ Corn
A quick hike above US$6/bushel
Corn futures were the star of the show on the CBOT in April. Nearby futures increased from US¢560/bushel on March 28th to US¢606/bushel on April 15th, before easing to US¢576/bushel on April 24th. April has provided bullish news for both the US old crop and the new crop.
Concerning the old crop, prices moved upwards after the USDA’s monthly supply/demand report. The headline news was that US ending stocks had been revised sharply lower, from 36.5mt to 32.6mt. As had been expected for some time already, US exports were revised higher; moreover the market was taken aback by a 5.1mt increase in domestic feed use which more than compensated for a 2.5mt drop in projected demand from the ethanol industry. At the world level, ending stocks were seen slightly lower at 103mt versus 104mt previously.
Concerning the new crop, prices reacted bullishly to the USDA’s plantings report of March 31st, which also surprised the market by predicting an 8% drop in corn plantings to a mere 86m acres. In February, USDA officials had mentioned 90m acres as likely. Besides, wet weather in the US Midwest is hindering plantings: as of April 21st, it is estimated that only 4% of the corn crop was planted, versus an average of 18% for this time of the year. Towards the end of the month, dry weather returned to parts of the Midwest, alleviating concerns that the US crop would turn out even lower than anticipated.
Predictably, CFTC data suggests an increase in speculative investment on CBOT corn futures: from March 25th to April 15th, long non-commercial positions jumped from 391,000 to 447,000 lots. Shorts also increased, but not as rapidly. As a percentage of open interest, non-commercial length was at 22.8% on April 15th, compared to 21.2% three weeks earlier.
The market will keep monitoring weather developments in the coming days. It is generally accepted that the corn crop needs to be planted by early May in the US Midwest, or else yields suffer. US exports might also prove crucial: in mid-April they plunged to their lowest since August due to record prices. Prices could correct further if this trend of buyer resilience continues.
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Soft Commodities - Grain and Oilseeds \ Rice
More export restrictions, more hoarding, more US$/tonne, more panic
The export price of grade B Thai rice has jumped by over US$400 since our last publication, reaching US$950/tonne on April 24th. With prices at all-time highs for yet another basic foodstuff, it is no surprise rice has been making headlines in the mainstream media.
Why have rice markets suddenly become so nervous? Indeed, from a macro point of view the situation doesn’t look overly dramatic: according to the USDA’s latest estimates, milled rice production this season will hit 425mt, the highest level ever. With consumption seen at 422.5mt, there should even be a small surplus on world markets. But then, what about world stocks, which are reaching worryingly low levels for other grains? The USDA anticipates they will total 77.2mt at the end of 2007-8, which is higher than in any of the three previous seasons. At 18.27%, the stocks-to-usage ratio is quite low – similar to wheat’s – but it’s been roughly at the same level since 2004. So why have prices only jumped recently?
The one important thing about the rice industry is that only 7% of global production is exported: the world as a whole may not be running short of rice anytime soon but the relatively small export markets are getting squeezed for various reasons.
Hoarding seems to be a problem in almost all of the major producers: higher prices become a self-fulfilling prophecy when middlemen and millers stop selling rice in order to increase future profits. With widespread media coverage and predictions that medium quality rice will soon top the US$1,000/tonne mark, it is no surprise that countries such as the Philippines, Malaysia, Thailand, or China have to clamp down on hoarders and increase penalties. It has been estimated that up to 1mt of Thai rice – more than 10% of annual exports – is currently being withheld from export markets. In the Philippines, president Arroyo has gone as far as “declaring war” on hoarders and deploying military troops to investigate warehouses.
Export restrictions are the other main issue at the moment: governments worldwide are getting increasingly concerned about food security and maintaining high buffer stocks. Vietnam, Egypt, India and Indonesia have all banned new export deals for the time being, and there are rumors that even Thailand will have to curb exports: prominent officials have suggested that the current export pace of 1mt+/month may not be sustainable. Meanwhile, China imposed a 5% export tax at the start of the year.
Some of the main importing countries in Africa and East Asia are particularly vulnerable to the price hikes as most of them are poor and heavily reliant on rice imports for feeding their citizens. Considering the current lack of cheap substitutes and the possibility – or the reality – of civil unrest, these governments are not likely to stop buying rice even in the face of high prices. Quite the opposite: many of these countries are eager to secure larger than usual stocks, fearing higher prices and shortages in the near future.
In order to tackle rice shortages, the Philippines recently lowered its import tax on rice from 50% to 10% and lifted import quotas for private importers. However, a government tender for 500,000 tonnes in late April only secured offers for 350,000 tonnes, at prices ranging from US$870/tonne to US$1,220/tonne. The news increased the sense of panic in the market, considering Vietnam had previously promised to fully supply the Philippines’ needs.
The situation should ease somewhat in the coming months as the main Asian producers are harvesting bumper crops. However, the mood of panic may prevent prices from softening at first. If prices keep rising, US rice will soon become competitive in spite of a freight disadvantage to many importing countries.
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Soft Commodities - Grain and Oilseeds \ Soybean
One last struggle for the US acreage competition
Soybean futures on the CBOT have traded erratically since our last publication, initially dropping below the US$12/bushel level before recovering to US$13.8/bushel on April 15th, and then easing to US$13.5/bushel on April 24th. There have been mixed influences: US acreage competition on the one hand, developments in the Southern Hemisphere on the other.
The USDA’s March 31st plantings report was flat-out bearish for soybean, anticipating a larger than expected 18% increase in soybean plantings to 74.8m acres. This ought to have depressed soybean prices; however they kept on rising, pulled upwards by record corn prices. The reasoning is that the USDA’s survey was conducted in early March, when soybean was trading above US$15/bushel, whereas corn at about US$5.50/bushel wasn’t looking so hot. With corn above US$6/bushel and soybean sharply lower at US$12/bushel when the USDA’s report was published, farmers still had time in April to switch land from soybean to corn. However, persistently wet weather in the US Midwest throughout April might have encouraged soybean plantings instead of corn, considering soybean has a longer planting window than corn.
This month’s supply/demand report from the USDA was ambiguous for soybean. Highlights included a 4% increase in the world ending stocks estimate to 49.3mt, but bulls were happy to see a large increase in US exports estimates from 27.9mt to 29.3mt.
In the Southern Hemisphere, Argentinean farmers called off their blockade of roads and ports after 3 weeks of strike, but there remains a risk of further disruptions as negotiations are still ongoing concerning the new variable export tax scheme. The strike has affected Argentinean exports and shifted demand to Brazil and the US, lending support to CBOT prices. However, both Brazil and Argentina are anticipating large crops and the harvests are advancing at a good pace.
CFTC data for the period from March 25th to April 15th is interesting as non-commercial length increased from 21.8% to 23.1% of open interest, however this doesn’t imply a surge in investor bullishness. In fact, longs decreased from 165,000 to 157,000 lots, but shorts decreased even faster – from 50,000 to 37,000 lots. This might well be a case of investors who were short on soybean deciding to buy the dip, as they didn’t expect prices to fall much further.
We tend to agree with this perspective: in spite of an improved supply outlook in the US, strong demand growth from Asian countries remains the key factor in the soybean market and will support prices in the medium-term.
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Soft Commodities - Grain and Oilseeds \ Wheat
Wheat corrects on good harvest prospects, decoupling from corn and soybean
Wheat futures were the laggard of the CBOT grains and oilseeds complex in April. Prices retreated from US¢989/bushel on March 28th to US¢809/bushel on April 24th, the lowest level since November of last year. European wheat futures tumbled down even faster to 200euros/tonne, a 9 month low. Why did wheat perform so poorly in April, whereas corn and soybean, for instance, made gains? The wheat market actually got bearish vibes from both the old crop and the new crop.
Concerning the old crop, the USDA’s monthly supply/demand report was a little bearish, with 2007-8 ending stocks revised up by over 2mt to 112.5mt, due to slightly higher world production and lower feed use in the EU. Meanwhile, US exports were revised upwards from 33.3mt to 34.7mt, but this was counterbalanced by a reduction in US feed use.
Concerning the new crop, the USDA’s plantings report of March 31st gave a bearish start to the month, predicting a 6% increase in 2008 US wheat plantings to 64m acres. Analysts had been anticipating a slightly lower figure. The market is also anticipating a large 2008 crop in the Northern Hemisphere, and this is putting downward pressure on prices even though corn and soybeans have been making gains.
The overall mood is definitely bearish as prices didn’t even move up when Kazakhstan announced it would ban wheat exports until September 1st, and Argentina decided to close the wheat export registry indefinitely. Later in the month the market did react bearishly with news that the Ukraine would allow 1.2mt of wheat exports in the next 2 months, up from a quota of 200,000 tonnes previously. It is thought that Russia might follow and reduce the current 40% export tax.
Dryness concerns for the US hard spring wheat belt were also brushed aside by the trade, especially when rain clouds started moving over the Western Plains later in April.
CFTC data for the last 4 weeks is supportive of the fact that funds appear to be getting more bearish on wheat. Long non-commercials increased marginally, but shorts jumped by 10%, reducing non-commercial length from almost 8% of open interest to 6.6%.
Wheat has tumbled down because good harvest prospects mean stocks have a fair chance to build up from low levels next season. In the past few months, a simultaneous increase in corn and soybean prices would have meant an automatic recovery in wheat prices. However, acreage competition is dying down, thus prices across the grains and oilseeds complex do not need to remain as closely correlated as before.
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Soft Commodities - Tropical Products \ Cocoa
Bearish drivers ignored by the market
In April, ICE cocoa futures soared to a six week high, reaching US$2859/tonne on April 24th. This marks a 17% increase since our last release.
A number of bearish news were published in the last weeks, but the market seemed to ignore them.
First, Ivorian ports received 1.016 m tonnes of beans from the beginning of October to April 21st, 6% higher than the same time last year.
Since West Africa has experienced good weather so far, prospects for the mid-crop are favorable.
In addition, cocoa production in 2007/2008 is projected to hit 3.73 m tonnes, an increase of 10.5% compared to last year, thanks to more favorable weather in West African producing countries.
The rise was mainly supported by general buying in commodities owing to the U.S. dollar’s record low against the Euro.
On the ICE, net long non-commercial positions rose from 50,000 lots on April 1st to 54,400 lots on April 15th. Non-commercial positions totalled 22% of open interest on April 1st. On April 15th, positions amounted to 27% of total open interest.
Besides, European first quarter cocoa grindings were up by 4.7% compared to last year lead by German grindings (16.2%), suggesting strong nearby demand. In the mid term, it is thought that economic recession might slow down demand for chocolate in the mid term.
The Liffe July 2008 contract is trading at a £80 premium to September, which in turn is trading at a £35 premium over December. This unusual backwardation is due to a tight short term outlook with low certified stocks and suspicion over the quality of the remaining stocks.
Fundamentals are bearish and point toward a correction. However, current backwardation attracts renewed attention for funds, self-justifying a continuing increase in nearby prices in the short term.
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Soft Commodities - Tropical Products \ Coffee
Arabica-Robusta spread bounces back
Arabica has outperformed Robusta so far in April, progressing 4% to US¢143/lb, while Robusta has retreated to US¢112/lb. As a result, the Arabica-Robusta spread has shot back above US¢30/lb.
Arabica’s move upwards is a little mystifying considering fundamentals haven’t changed since last month: there remains a massive 20% gap between Conab’s official estimate of less than 45m 60kg bags for the impending crop and the highest estimates around 55m bags. However, Conab has developed a reputation for underestimating the crop, and the higher figures are said to be mostly coming from hedge funds that are short on coffee – and would thus benefit from a drop in prices. The market consensus is still around 48-50m bags, which remains bearish. One explanation for the upward move is that we are entering “frost watch” period and that a risk premium has been factored into the price. However, frost hasn’t been much of a problem for Brazil’s crop in the past few years. Another explanation is that coffee roasters have taken advantage of lower prices and entered the market. Arabica was looking particularly undervalued compared to Robusta early this month, with the Arabica-Robusta spread at a 12 year low.
CFTC data for the period from March 25th to April 15th shows speculators are turning more bearish, in contrast with actual price movement: non-commercial longs decreased substantially from about 46,000 lots to 40,600 lots, while shorts increased from 12,300 lots to 14,800 lots. Non-commercial length has decreased from close to 20% to 15.4%.
Robusta initially declined below US¢110/lb before recovering back to last month’s levels. Part of the reason why Robusta fell is that the Arabica-Robusta premium had dropped to levels unseen since 12 years ago, prompting roasters to buy less Robustas and more Arabicas. Robusta was also hurt by a seasonal pick-up in shipments from Asian producers. Indonesia, for instance, is exporting about 1,500 tonnes per week, and this figure is expected to rise to 4,000 tonnes/week next month. The Indonesian Coffee Exporters’ Association expects exports this year will total 325,000 tonnes, up 8% from last year.
Meanwhile, a leading Belgian analyst has recently raised its estimate of world coffee production to about 142m bags, while consumption is seen at 126m bags. The global surplus is now forecast at 15.7m bags versus 12.3m bags previously. The International Coffee Organization’s estimates are quite different, with consumption also pegged at around 125m bags, but with production at only 117m bags. The coming months will shed more light on the situation, with Brazil’s crop becoming ready for harvesting.
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Soft Commodities - Tropical Products \ Sugar
Is sugar ethanol powered?
Raw sugar futures in New York initially firmed in April, going from US¢11.73/lb on March 28th to US¢12.67/lb on April 15th. In the second half of the month, they retreated to US¢11.5/lb. White sugar on the LIFFE did better, moving to US$348/tonne from US$331/tonne in late March. The white sugar premium is up to around US$95/tonne, the highest level since July of last year, but significantly below the US$160/tonne+ levels seen at the end of 2006.
CFTC data suggests no dramatic pick-up in speculative activity on raw sugar futures: in the period from March 25th to April 15th, non-commercial longs actually decreased marginally, while shorts increased a little. As a percentage of open interest, the net long non-commercial position is almost unchanged at 17.2%.
It is still surprising to us that funds remain persistently long in sugar, given bearish fundamentals. The month of April has so far seen more reminders of the bearish situation: FO Licht has revised its 2007-8 surplus stock estimate upwards to 86.22mt from less than 85mt 5 months ago. Besides, there has been favorable news concerning the Australian cane crop, which the USDA pegs at 37mt, up 1mt from last season. As a result, sugar output could rise by 4% to 5.2mt, 3.94mt of which would be exported, slightly more than last year. The Brazilian cane crop is still expected over 10% higher than last year, with possibly more than 500mt of cane being produced in the Center-South harvest. In India, there is talk that the government will extend export subsidies by another 6 months in an effort to sell off stocks.
In spite of these bearish facts, sugar was given a lift by surging crude oil prices. Oil at US$115/bbl certainly gives credence to the idea that Brazil’s ethanol exports will increase, even though many countries are reluctant to buy Brazilian ethanol on environmental concerns. Besides, expensive oil also increases ethanol demand from Brazilian flex-fuel cars – which can run on both ethanol and gasoline – thus contributing to a surge in domestic ethanol demand.
Sugar values were also possibly boosted by the fact that the Russian seasonal import duty ends next month: traders may have already started to buy sugar in order to store it and then sell it on the Russian market once the import duty is lowered.
In the last week of April, sugar values retreated somewhat abruptly. This was probably caused by a new forecast for Brazil’s Center-South crop by the Brazilian Sugarcane Industry Association (Unica), putting it at 498mt, not far from the highest trade estimates. Besides, a strengthening dollar and softer crude oil prices diminished sugar’s appeal as a hedge against inflation.
Sugar below US¢12/lb looks more realistic to us and we expect prices to maintain this range in the near future.
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Statistical Appendix - Prices
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Statistical Appendix - LME Stocks
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Statistical Appendix - US Oil & Natural Gas Stocks
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Research Analysis Group -
Christophe Lhermitte; Electricity, Metals
Régis Collieux; Oil, Oil refining, Petrochemicals, Fertilisers
Marco Boeri; Natural gas, including LNG
Emmanuel Jayet; Soft commodities (grains, tropicals, fibers, paper pulp...), Biofuels
Sebastien Loison; Energy, Emissions & Product Development
Eric Louvert; Metals
Yves-Erik Paré; Commodity Markets
Hélène Drouilly; Natural gas, including LNG
Rym Dekar; Soft Commodities
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