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November 28, 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 (2008). All rights reserved.
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The Markets at a Glance -
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Energy - Crude Oil
Further down?
Both grades dramatically sunk in November, to settle at levels never hit since February 2005. Within the first 20 days of November, Brent prices plummeted by 25%, going past the symbolic US$50/bbl to US$45.2/bbl on November 21st. The last week of November saw Brent prices slightly recovering to almost US$50/bbl on November 26th. WTI followed Brent’s footstep, tumbling to US$49.1/bbl on November 21st, before rebounding above US$50/bbl. The WTI-Brent spread remained high, hovering in a US$3-7.5/bbl range.
In the first two weeks of November, CFTC data revealed a dramatic increase in short non-commercials, which climbed by around 52,000 lots as market participants did not believe the market had already bottomed out; while longs only increased by 7,000 lots. As a result, the non-commercials as a percentage of open interest tumbled to -4.5%. The rest of the month saw a sharp decrease in short non-commercials, thus helping net non-commercials as a percentage of open interest to recover to 1%.
OPEC’s decision during its advanced meting, on October 24th, to slash production by 1.5mb/d effective on November 1st did not manage to buck the bearish trend on crude oil markets. The market indeed remained widely focused on poor demand forecasts, which were even revised lower this month. In its latest report, the IEA cut its previous estimates for 2008 and 2009 demand respectively by 330kb/d and 670kb/d. As a result, oil demand in 2008 is now expected to increase by only 0.12mb/d, to 86.2mb/d and to 86.5mb/d in 2009.
US stocks data highlighted the poor demand situation in the crude oil and oil products markets. Since our last release, crude oil inventories rose by 8.9mb, to a total of almost 200mb; while gasoline posted a 5.8mb increase thorough November. Yet, cold weather in recent weeks along the East coast quite offset the lacklustre demand for distillates. As a result, distillates stocks remained quite flat since our last release, at 126mb.
Together with bearish demand forecast, official announcements leant on the idea that the world was entering a recession, thus adding to the pessimistic mood. The IMF predicted for the OECD the first annual fall in growth since World War II and the lowest economic growth in emerging markets since 2002. Besides, with 8.5%, China will experience its lowest growth rate since 2001.
In other news, Chevron’s announcement that a pipeline had been sabotaged in Nigeria’s Niger Delta, thus forcing the company to shut on-shore production in the area, did not manage to offset concerns about demand destruction. Yet, more supportive was the hijacking of a 2mbbl Saudi Arabian supertanker by pirate in the east coast of Africa, causing shippers to divert vessels from the area. As a result, delays in delivery can be expected.
The next step in the fight against tumbling oil prices will be the next two OPEC meetings in Cairo and Algeria. The next meeting in Cairo, on November 29th, will gather oil ministers from the OPEC to discuss conditions for further output cuts, which will probably be announced on the December 17th meeting in Algeria.
During the next discussions, oil ministers will have to discuss how much production cut is needed to buck the current bearish trend on oil markets.
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Energy - European Refining Margins
Still healthy refining margins despite demand collapse
During the past month, refining margins rebounded slightly before a return close to their end October levels. Our NWE Brent cracking gross margin indicator increased from USD 4.6/bbl on October 30th to a maximum of USD 7.3/bbl on November 12th before declining to USD 5.4/bbl on November 27th. Our NWE Brent hydroskimming indicator stayed very close to our cracking indicator varying from USD 5.0/bbl to USD 7.3/bbl and to USD 5.3/bbl. During this period, NWE Urals margins rebounded even more than NWE Brent margins and finished the month well above end October levels as Brent/Urals spread widened to more normal levels (USD 1.3/bbl on average versus USD 0.2/bbl at the end of October). Our Urals cracking gross margin increased from USD 0.3 to USD 4.7/bbl before decreasing to USD 3.4/bbl. Our NWE Urals hydroskimming indicator increased from USD -3.5 to USD +1.4/bbl before decreasing to USD 0.5/bbl.
Quarterly average for Brent cracking margin appears very close to its highest level (Q4 2005) and quarterly average for Brent hydroskimming is even better. However, quarterly averages for NWE Urals margins remain depressed compared to their Brent counterparts.
In November, refining margins fluctuations reflected contradictory crack spreads influences. Light distillates extreme weakness was compensated by still high middle distillates and heavy products cracks. Light distillates cracks have experienced new historical lows and have remained weak since then: gasoline (regular 10ppm FOB barges NWE) crack tumbled to USD -7.8/mt last Friday while naphtha crack (FOB barges NWE) crashed to USD -143/mt at the beginning of the month. Middle distillates cracks stayed high, but tended to erode: ULSD (10 ppm FOB barges NWE) crack declined from USD 195/mt to USD 189/mt, jet fuel (FOB barges NWE) from USD 220/mt to USD 204/mt and heating oil (0.1% FOB barges NWE) from USD 170/mt to USD 154/mt. After a short drop, heavy products cracks rebounded: HSFO 1.0% (FOB barges NWE) crack increased from USD -113/mt to USD -99/mt and HSFO crack from USD -214/mt to USD -165/mt.
Refining margins strength is surprising considering world oil demand trend. US oil consumption contracted by 6.6% yoy during the past four weeks (ending November 21st) after -7.0% in October and -12.8% in September (revised data). Chinese oil demand growth also decelerated to 3.9% yoy last September. However, NWE refining margins were supported by the rebound of European demand (+2.3% yoy in September after three negative months). Noticeably, heating oil demand was sustained by huge stocks rebuild in key consuming countries (+11.8%). After months of weakness, heavy products demand – and primarily for LSFO – rebounded to more normal levels; likely due to some stocks rebuilt by power companies.
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Energy - US Natural Gas
Henry Hub fearing the future
Over the period October 31st, 2008 (date of our last publication) to November 26th, 2008 Henry Hub gas prices have evolved in a range included between a maximum of US$ 7.06/MMBtu (on November 10th) and a minimum of US$ 6.17/MMBtu (on October 31st), for an average price of US$ 6.66/MMBtu (5% lower than the average price of US$ 7.08/MMBtu over the same period in 2007).
Since the beginning of the year 2008, the average price has been equal to US$ 9.16/MMBtu, 32% higher than the corresponding period of 2007 (and 36% higher than in 2006).
In November, conversely to the whole energy complex trend, US Natural Gas prices increased, marking a 4.5% gain since the beginning of the month. Temperatures dropped across the US during the second week of the month, triggering a peak in HH spot prices at 7.06 US$/MMBtu as of November 10th. US Natural Gas prices evolved then in the 6 - 7 US$/MMBtu range for the rest of the period, settling at 6.45 US$/MMbtu as of November 26th, before the Thanksgiving pause. On the one hand US cold temperatures underpinned gas quotations close to 7 US$/MMBtu; on the other hand, the worsening of the macro-economic picture prices weighed on HH as well as on other commodities.
Nymex gas futures open interest lost 4%, settling at 751,279 contracts as of November 18th. Non commercial trading is pointing out a clear downward price trend with short positions now 2.7 times more than long ones. In November, the 6 month Nymex futures curve kept on flattening, gaining on average 2% all along the strip compared to October prices. The turmoil in the real economy expected for 2009 is spreading uncertainty in the futures market, resetting the seasonal forward curve slope.
As of November 21st, according to EIA, working gas in storage was 3,422 Bcf, with a net withdrawal of 66 Bcf since the beginning of the month. Stocks were 88 Bcf above the 5-year average and 109 Bcf lower than last year. US Natural Gas storage kept on growing throughout the first half of the month. Despite a 4.1% and 3.2% increase expected by EIA in 2008 residential and commercial gas demand respectively, gas storage levels remain high due to the domestic production increase on a yearly basis (+6% in 2008 according to EIA) and the power generation gas usage drop expected in 2008 (-2.3%).
In November the US experienced a sharp drop in drilling activity. According to Baker Hughes, the number of rigs settled at 1,433 as of November 26th, some 7% or 109 rigs less since the beginning of the month. The shrinking has been mostly triggered by the US current gas prices. With Henry Hub quotations hovering around 6.5 US$/MMBtu, likely unconventional gas drilling costs can be barely covered, without any additional margin for producers. In Canada, the rigs number drop has been much lower, moving from 241 to 234 rigs, down 3% on a monthly basis.
Several bearish factors are weighing on Henry Hub over the medium term. From the consumption side, economic recession’s shadows spreading over the US sunk Natural Gas consumption forecasts for 2009 (now down by 0.2 % according to EIA). The Gulf of Mexico offshore production is foreseen to increase by 2.7% next year, and non-G.O.M. production should rise by 2%, even though the slow-down of drilling activity is still difficult to evaluate. Furthermore declining European oil-indexed gas prices and limited natural gas storage availability in Europe, added to a growing LNG global production, could lead to higher US LNG imports next spring. Despite all these bearish factors, weather will remain the main driver during the winter season. In December we expect prices to evolve between 6.5 and 7.5 US$/MMBtu unless the sudden arising of a cold weather, that could boost gas prices up to 8 US$/MMBtu.
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Energy - Emissions
European Trading Scheme
Not surprisingly, carbon prices have continued to be heavily influenced by ongoing developments in the global financial crisis. With a number of key countries formally stating their domestic economies are in recession, and a chorus of forecasts predicting a widescale contraction of industrial sector demand growth (and associated fall in demand for primary fuels), carbon prices have fallen significantly in line with the rest of the energy complex.
The benchmark Dec-08 EUA contract fell from €17.94 (October 31) to an all time (exchange traded) low of ~ €14.92 (November 20), before clawing back at €16.31 on November 27. Lower economic growth and very bearish equities markets weighed heavily on oil prices which have continued their relentless slide. Oil led and the rest of the energy complex followed, in particular German baseload power and the UK coal-to-gas fuel switching levels. Over the short term, the only bullish factor was weather with some parts of Europe seeing below seasonal normal temperatures. Yet this did little to cause a rally in prices as it was largely offset by continued demand destruction from the industrial sector.
CERs and ERUs markets
Dec 08 CER prices have more or less followed the same decreasing trend of the EUA prices. The benchmark contract started the month at €15 and hardly crept till €16 on November 14 before tumbling steeply to €13.4 on November 20. Thereafter, forward CER prices recovered slightly and closed at €14.35 on November 27.
The Kyoto credit markets have been desperate to grasp some shred of optimism in the run-up to the UNFCCC CoP/Mop in Poznan next month. Last week, help arrived from the clearer perspective of the set-up of a cap-and-trade system in the US following the election of Barack Obama, although it seems the market has for now failed to respond proportionately. The bounce in recent days is largely down to directional sentiment linked to Brent Oil and European power and gas, rather than interpretation of regulatory indicators.
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Energy - Coal
Demand still dead
After having settled below US$100/tonne at the very end of October, CIF ARA thermal coal rebounded in the first weak of November to reach US$108/tonne, before severely tumbling to US$79/tonne at the end of the month.
Disconnected from its fundamentals, coal prices mainly reacted to crude oil fluctuations but also succumbed to the bearish economic outlook. In the first week of the month, CIF ARA prices surged in line with a sudden upturn in the crude oil market, before plunging with one another.
Besides, reasons for CIF ARA coal bearishness are also to be found on the demand side, with few buying interest from European utilities reported this month, despite decreasing stockpiles at discharging ports in Amsterdam and Rotterdam. Indeed despite the upcoming winter season, when coal purchases usually increase in Europe, spot demand remained in the doldrums, dragging Richards Bay prices downward from US$95/tonne to US$76/tonne.
This lack of activity also weighed a lot on freight rates, which tumbled to an average price of US$5/tonne for the three main routes (See chart 4).
Newcastle coal was also pressured by the lack of activity, sending prices well below the US$80/tonne mark. Highlighting the deteriorating demand, exports from the port recorded up to a 17.2% decrease the week ending November 17th. Piece of fundamental news that the Chinese thermal coal export quota will be 10% lower yoy barely sparked any reaction in the Newcastle coal market.
On the coking coal market, demand for the raw material dropped in line with the slowdown in the steel market. In this regard, given the current lack of activity in the steel sector, contract prices for 2009 could fell as much as 60% compared to 2008 benchmark., according to one analyst.
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Energy - European Power
Power prices finally succumbed to lower demand
Since our last release, European power prices, particularly German and French power prices, posted strong losses. Within a month French and German average baseload respectively fell by 24% and 22%; while UK baseload only recorded a 16% mom decrease, dropping to 67euros/MWh.
For the first time of the year, both German and French baseloads and peakloads fell under last year level, up to -28% yoy for the French peakload. On the contrary, UK power prices still recorded a 35% yoy increase.
The general slump in European power markets came with the realization Europe was sliding into recession, thus reducing expected demand for power.
Lower coal prices and improving supplies pushed German power prices down from 90euros/MWh to 50-60euros/MWh in mid-November. On the supply-side, fewer unplanned shutdowns at lignite fired plants, the end of nuclear maintenance, and higher wind power generation eased concerns for a supply shortfall. Yet, after milder than average temperatures in Germany, power prices rebounded at the end of the month on the announcement of above average temperatures forecast.
Despite the drop in UK power prices observed since our last release, UK baseload still remain at elevated levels compared to previous years. In the first two weeks of November, continued low availability from coal-fired and nuclear plants sustained UK power prices at elevated levels (GBP80/MWh~95euros/MWh). Yet, weak industrial demand helped price easing to a low GBP48/MWh (57euros/MWh) in late November.
French power prices experienced the sharpest decline, both on a mom and yoy basis. The French market indeed benefited from improving plant availability, with an additional 3GW capacity available in early November. Besides, hydro reservoirs levels were significantly higher, with a level 9 percentage points higher than the long term average. Yet, increasing demand for electrical heating at the end of November supported French baseload, which surged to 95euros/MWh on November 25th.
Regarding long term power prices, the prospect for a weaker industrial demand has already bean taken into account, with long term prices seen significantly lower.
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Metals - Non-Ferrous Metals \ Alumina
Tumbling Chinese demand
November saw both International and Chinese alumina prices tumbled. Since our last release, spot alumina prices dropped by 21% to settle at US$225/tonne, while Chinese prices underwent a strong 26% decrease mom, to RMB1, 875/tonne at the end of November.
Demand for alumina suffered a lot from the current slowdown in the aluminum sector. Indeed numerous output reductions in the aluminum sector, especially in China, drove alumina demand in the doldrums. As a result, alumina imports in China totalled 260,000 in October, down 21% mom.
On the supply side, after having cut output by respectively 256,000 and 550,000 tonnes, at its Rockdale and Point Comfort refineries, Alcoa announced the suspension of its expansion plan on its Wagerup alumina refinery in Australia, aiming at increasing output from 2.6m tpy to 4.7m tpy. In China, Chalco has so far idled 38% of its 10m tpy alumina refining capacity on the back of low demand.
With ongoing production cuts in the aluminum sector, an improvement of alumina demand is not set to happen in the short run. Besides, further output reduction in alumina refineries can be expected in response to current low spot prices, which tumbled by almost 40% in les than 2 months.
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Metals - Non-Ferrous Metals \ Aluminum
Output cuts ineffective in boosting prices
After having briefly surged above the US$2,000/tonne mark on November 5th, cash aluminum on the LME declined through the month amid volatility, to settle at US$1,720tonne on November 27th. The 3mth-cash spread still did not show any surprise, remaining entrenched in contango at US$45/tonne at the end of November.
Worsening situation in the automotive industry sharply hurting the US drove demand for aluminum in the doldrums. Indeed, with an estimated 45% yoy decrease in GM car sales, automakers sharply restrained their demand for the grey metal. The lack of activity thus weighed a lot on inventory level, which rose to their highest since the beginning of 1995, at more than 1,700,000 tonnes.
Given the sharp deterioration on the aluminum market, producers’ response tended to strengthen, with significant output cut announced. Among the strongest reaction, Alcoa announced it would cut its output by an additional 350,000 tonnes, thus bringing the total output reduction at 650,000 tonnes, 15% of Alcoa’s global output. UC Rusal, world’s major aluminum producer, planned to suspend production at its Zaporozhye refinery in Ukraine (268,000 tpy capacity). In the same vein, other major producers such as Norilsk Hydro and Nalco are also considering output reduction as well as project delays.
Yet, despite strong efforts to significantly reduce output, the latest Chinese data showed that the aluminum production in China, the world’s largest aluminum producing country, is all the same up 8.2% yoy.
On the export market, in a bid to foster buying interest, the Chinese government planned to increase the export tax rebate from 11% to 13% on aluminum plate, sheet and strip. This measure will be effective on December 1st.
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Metals - Non-Ferrous Metals \ Copper
More output cut needed?
Cash copper on the LME quite followed a downward trend in November. After having peaked at US4,230/tonne on November 4th, cash copper dropped to settle at US$3,470/tonne, before rebounding to US$3,664/tonne at the end of the month. The 3mth-cash spread settled comfortably in contango, up to US$94/tonne, before finishing at US$48/tonne in late November.
CFTC data for the October 28th-November 18th period revealed a sharp increase in long non-commercials, from 66,000 to 80,000 lots; while shorts quite fell by the same amount. As a result, the net non-commercial as a percentage of open interest remained quite unchanged since our last release, at a substantial -20.1%.
The sharp slowdown in the US construction sector still drove copper demand in the doldrums and still weighed on prices. According to the latest report of the US Census Bureau, housing starts in the US dropped by 4.5% mom in October and by 38% yoy.
Highlighting the current poor demand, exports data showed that Chinese imports in October were 8.5% lower yoy. Yet on a mom basis, Chinese imports posted a staggering 30% increase as current low prices encouraged China to pile up new stocks.
On the export market, the Chinese government is considering an increase, from 5% to 13%, of the tax rebate on some copper products.
On the supply-side, severe output adjustments announced last month were successful. Chinese data indeed showed copper output in October fell by 7% mom and by 8% yoy. Yet on a global scale, further production cuts are expected to reduce the 75,000 tonnes surplus recorded in the first eight months of the year. Hindustan copper recently announced it planned to cut output by 20%-equivalent to 8,800 tonnes- in the year ending March 31, 2009.
With demand not expected to recover before next year further price drops can be expected by the end of the year at the earliest. Yet, common action from copper producers to cut production should prevent prices from tumbling for a sustained period.
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Metals - Non-Ferrous Metals \ Lead
Is demand about to rebound significantly?
After briefly peaking above US$1,500/tonne on November 4th, cash lead prices on the LME declined through November, hitting US$1,170/tonne on November 20th, before rebounding above US$1,200/tonne and finally finishing at a 2-year low, at US$1085/tonne. The 3mth-cash spread clung to a contango of about US$15-26/tonne.
Bearish supply news rekindled oversupply concerns on the lead market. In mid-November, the National Statistics Bureau revealed Chinese lead production in October was up 20% mom and 49% yoy, despite output cuts scheduled as early as July. One explanation for this dramatic surge in Chinese production could be cheaper lead concentrate imports.
Regarding the lead market balance, the latest International Lead and Zinc Study Group (ILZSG) report showed a 24,000 tonne surplus in the first nine months of the year, compared to a 49,000 tonne deficit observed in the same period last year.
In industry news, in response to dropping lead prices further production cuts have been planned, with CBH announcing the cut of 38.7kt of lead in the year ending June 30, 2009. In the same vein, Xinling Refining revealed that Chinese lead smelters were idling production due to low prices. The company has cut 60% of its 100,000 tonnes capacity.
On the demand side, lead seemed to be less affected by the global economic turmoil, gnawing demand for base metals. Lead demand in the January-September period rose by 5.8% yoy, mainly driven by China posting a 21.4% increase. Yet, ahead of the winter-season demand for lead is expected to increase significantly together with car-battery replacement.
Given current low prices on the lead market as well as fears for an oversupply situation, further production cuts can be expected in the short-run to boost prices. Besides, it can also be expected that the seasonal surge in lead demand for car-battery will manage to help prices to recover.
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Metals - Non-Ferrous Metals \ Nickel
The stainless steel market not about to rebound
Cash nickel on the LME kept declining through November, after having gone past the US$12,000 tonne mark on November 4th. Within less than 20 days, nickel prices dropped by 20% to US$9,652/tonne on November 20th, before recovering above US$10,000/tonne at the end of the month. The 3mth-cash spread settled in contango, peaking at US$335/tonne in early November, before finishing at US$210/tonne.
Nickel demand and thus prices still suffered from an ailing stainless steel market. In China, the largest stainless steel producer in the country, TISCO reduced its production during October by around 50% in response to the deteriorating demand conditions. In the same vein, POSCO announced it would curb its stainless steel production in Q4 by 30% -equivalent to 150,000 tonnes.
Given current deteriorating demand, further production cuts were announced to stabilise the market. Vale planned to halt production at its PT Int. Nickel operation in Indonesia; while Xstrata announced it was stopping operations at the Craig and Thayer-Lindsley mines in Canada ahead of schedule. The combined output loss for the two mines is estimated at 8.2kt.
In other industry news, Norilsk Nickel is also considering to cut production at its African and Australian operations by early December.
As a result of the recent major output cuts, copper LME inventories only grew by 2.5% in October and 6% in November compared to 16.2% reached in September.
The outlook for the nickel market is quite gloomy, with the automotive and construction industries undergoing sharp difficulties thus pressuring demand for stainless steel. As a result, a strong recovery in the steel market is not set to happen in the short-run.
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Metals - Non-Ferrous Metals \ Tin
Output drastically cut
Since our last release, cash tin on the LME saw some volatility. Tin spot prices surged by 11% within the first week of the month to reach US$15,425/tonne on November 10th, before softening to settle at US$11,952/tonne on November 24th and rebounding above US$13,000/tonne at the end of the month. The 3mth-cash spread sank deeply into backwardation, hitting –US$472/tonne on November 6th, before slightly recovering to –US$97/tonne.
Announcements of strong production cutbacks provided some support to tin prices at the beginning of the month. Yunnan Tin Co, China’s biggest tin producer, revealed it will cut output by 30% in the fourth-quarter; while Yunnan Chenfeng Nonferrous Metals announced a 50% output cut, equivalent to 9,000 tonnes in a bid to support tin prices. As a result, China’s National Bureau of Statistics showed YTD Chinese output is 10% lower compared to 2007. In Indonesia, smelters in the Bangka-Belitung islands plan to remain shut until January.
Decreasing inventories in the first part of the month was supportive to tin prices, with stocks tumbling from 3,700 tonnes to barely 3,000 tonnes on November 10th, the lowest level for the last four years.
Yet overall bearishness came from low demand for tin. Indeed on the export market, Indonesian tin exports fell by nearly 60% yoy in October, due to poor demand from top consumers Malaysia, Japan and Taiwan.
Despite all these production cuts, tin did not manage to rebound sharply in November. Yet, given the current low inventory level and more drastic measures to curb output, a tin price recovery is likely to happen in the short-run.
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Metals - Non-Ferrous Metals \ Zinc
Zinc facing further output cuts
Cash zinc on the LME did not see any sharp move in November, hovering in a US$1,080-1,198/tonne range, before finishing the month a bit higher at US$1,213/tonne on November 27th. The 3 mth-cash spread dropped amid volatility through November, to settle at -US$7.5/tonne on November 26th.
This month again, the zinc market faced a strong wave of output reduction in bid to give some support to prices. On top of these production cuts, China, whose mines and refineries closure gathered momentum in recent weeks. In this regard, China’s top two zinc producers, Zhuzhou and Huludao, announced a 30% output cut in response to low prices. Altogether, Chinese smelters output cut are estimated at around 650,000 tpy of smelting capacity out of a total 4.67m tpy.
Outside of China, Nyrstar, the world’s largest zinc producer, announced the suspension of its operation at its Balen smelter in Belgium until mid-2009, on the back of low zinc prices. The output loss is estimated at 25,000 tonnes over the rest of the year, and up to 130,000 in H1 2009.
Currents output cuts seemed to have offset the weight of weak demand on inventory levels. Indeed this month, despite an ongoing lack of demand for zinc, inventories held steady at around 180,000 tonnes.
It is estimated with the recent fall in zinc prices, about one half of the world’s major producers are unprofitable. As a result, further output reductions can be expected in a near future in order to bring prices back to sustainable levels.
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Metals - Ferrous Metals \ Iron Ore
Steel weakness dragged iron ore down
After having hit a two-year low last month, spot prices for Indian iron ore CFR China slightly recovered in November. Yet, iron ore spot prices still remained well below 2008 contract prices, at US$74/tonne.
Indian iron ore benefited from a growing interest from Chinese buyers this month, who don’t seem to have yet swallowed Vale’s request for an additional 12% price increase on iron ore. Indeed, while the share of Chinese iron ore imports from India and Australia recorded a 1% and 2.75% increase yoy respectively, the share of Brazilian iron ore slumped by 3%.
Yet, global demand for iron ore still suffered from an ailing steel market, which forced many Chinese steel makers to cut drastically output and raw material purchasing. In this regard, Vale, the world’s biggest iron ore producer, announced in late October, it planned to slash production by 30m tpy in response to the slowdown in the steel market. In the same vein, Rio Tinto revealed it was cutting its Western Australian production by 10%.
On the freight markets, capsize rates are still affected by a lack of demand for iron ore shipments, and are not about to recover until Chinese demand resumes significantly.
In the import market, India imposed a 5% customs duty on iron ore and steel imports from November 18th, in a view to safeguard domestic producer’s interests.
Regarding iron ore contract prices settlement for 2009, Chinese iron ore markets participants expect 2009 Benchmark prices to fall by 20% given the current situation on the steel market. Yet, uncertainties regarding the depth of the crisis and its length will make negotiations tough and a final decision is not expected before several months.
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Metals - Ferrous Metals \ Steel
Is “long” demand about to resume?
The steel market showed some sings of stabilization in November. While flat products slightly dropped, long products remained quite flat or even rebounded.
Despite a gloomy outlook for the US automotive and construction sector, US steel imports increased by 15.7% mom in September. Yet, given the uncertainties surrounding the steel industry, such an increase is unlikely to remain sustainable.
On the contrary, China saw its steel imports tumbling by a massive 37.5% mom in October, dragging down HRC prices from US$595/ tonne to US$465/tonne at the end of November. In response to the sharp fall in steel prices since July, China’s biggest steelmaker Baosteel group announced it may cut production in December, following other Chinese producers who already cut production by up to 20%. In order to foster buying interest, the Chinese confirmed the removal of the 5% export duty on HRC, plate and sections from December 1st.
The export price for CIS billet posted slight gains, climbing from US$310/tonne to US$360/tonne. Billet demand from Middle Eastern countries did not show any particular sign of improvement this month, as buyers are waiting for prices to hit the bottom. Yet, Russian and Ukrainian mills are expected demand to rebound by early 2009.
On the Turkish rebar market, despite still no demand from Dubai, some other buyers have already come back to the market in November, such as Morocco, Algeria, Yemen, and Kuwait. In anticipation of an increasing demand from these countries, Turkish producers have already raised their offer prices to buyers, thus bringing the export price to US$465/tonne, up US$45/tonne.
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Soft Commodities - Fibers \ Cotton
Cotton facing poor demand
Sharp bearishness remained the main feature of cotton futures, which hit a 6-year low at US¢39.1/lb on November 11th. The rest of the month saw cotton prices hovering in a US¢39-41/lb range, but finished higher at US¢46.1/lb on November 26th.
Regarding non-commercials positions, cotton markets still suffered from long liquidation. Indeed CFTC data for the October 28th-November 18th period highlighted a drop both for long and short non-commercials, yet longs decreased at a faster rate. As a result, the net non-commercial as a percentage of open interest tumbled well below 0, at -2.7% at the end of the month.
Cotton market remained badly hurt from the current slowdown in the textile industry, which drove demand for cotton down 3% this year. In China, one of the main cotton consuming countries, cotton imports in the first nine months of this year dropped by almost 7% versus the same period of 2007. As a result, the USDA revised higher its forecast for world ending stocks, up 3.6% mom at 57m bales.
The slowdown on the export market spotlighted the drop in demand, with US exports recording a 8% decrease compared to 2007.
The supply-side did not fare better, with the news released by the USDA that world planted acreage was severely cut. In the US, total area planted to cotton in 2008 is estimated at 7.8m acres, down 26% yoy and the lowest level in 25 years, as farmers switched to higher yielding crops. As a consequence, cotton output in the US is expected to reach 13.5m bales this year, down 30% yoy.
Regarding the current economic outlook, it seems demand for cotton is not set to improve in the short-run, thus leaving room for further price decrease.
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Soft Commodities - Fibers \ Pulp & Paper
Inventories still higher on poor demand
November saw both grades remaining flat, with NBSK delivered to Western Europe holding steady at US$840/tonne and BEKP remaining at the same level since October 1st, at 565euros/tonne. The European NBSK-BEKP spread slightly decreased since our last release, hovering around US$120/tonne, on the back of dollar fluctuation.
As previously expected, pulp demand remained weak in October, with shipments dropping by 9.5% yoy in October. Demand was particularly weak in North America (-10%) and in China (-24.1%); while Europe and Latin America recorded modest demand declines with respectively -4.3% yoy and -0.4%.
Both grades suffered from the deteriorating demand, with shipments of softwood declining by 8.8% while hardwood shipments declined by 8.2% yoy. As an evidence of current hard times undergone by the pulp market, the shipments–to-capacity ratio kept on declining to 83% in October from 86% in September.
Lacklustre demand on the pulp market kept on feeding inventories, driving them to record high levels. Global inventories indeed rose to a 7-year high, totalling 47 days of consumption in October, up 3 days compared to September. Within a month, inventories rose by 200,000 tonnes, whereas the average seasonal increase for the month of October is around 86,000 tonnes.
Among both grades, hardwood posted the strongest increase, climbing to 59 days of consumption from 53 days in September; while softwood stocks only rose to 38 days from 36 days.
Given the current slowdown in the pulp market as well as the prospect for a deteriorating situation in the short-run, some producers are taking production facilities offline for an indefinite period of time. Yet, it seems it will not be enough to offset the effects of the weak economic backdrop.
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Soft Commodities - Grain and Oilseeds \ Corn
Corn rebound in weather’s hands
After having surged above US$4/bushel on November 4th, Corn futures on the CBOT gradually declined through November. Corn prices indeed hovered in a US$3.6-3.9/bushel range during the month, before tumbling to a 14-month low at US$3.4/bushel on November 21st and then slightly recovering to US$3.5/bushel at the end of the month.
The corn market was still characterised by fund-liquidation, speculative fund buying was however the prevailing trend. CFTC data for the October 28th-November 18th period revealed a drop in long non-commercials, yet shorts posted a 25,000 lots increase. Since our last release, the net non-commercials as a percentage of open interest dropped from 8.9% to 5%.
Fears over the slackening global demand remained corn’s market main driver. In its latest supply/demand report, the USDA indeed released data highlighting the current bearish demand situation. US exports are indeed seen 16mt lower yoy, at 80mt; while annual US feed domestic consumption was revised 2.5mt lower mom and 10mt lower yoy, at 488mt. Deteriorating demand thus also led to the revision of world ending stocks, which are now estimated at 110mt, up 4mt mom.
On the supply-side, news was quite mixed, only providing underlying support to corn prices. Behind schedule harvest in the main US growing regions are indeed putting in jeopardy the remaining 20% crops, with cold and wet weather conditions setting in. On the contrary, drought and hot weather in Argentina are hampering crops development. Given these poor weather conditions, the USDA revised lower its production forecast both for the US and Argentina respectively by 0.3mt and 1mt. Yet, higher than expected crops in Europe and in Russia quite offset disappointing news from the Americas.
In the short-run, given the gloomy outlook for corn demand, it seems attention will be paid to weather conditions, particularly in the US.
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Soft Commodities - Grain and Oilseeds \ Rice
Rice pressured by record crops
After having held steady at US$720/tonne throughout October, the export price for Thai rice 100% grade B slumped by 20%, to settle at US$580/tonne in November, before recovering to US$605/tonne at the end of the month.
Additional supply on the Thai market put a significant downward pressure on export prices. Indeed in a view to clear space in its warehouse to receive the new crops, which were harvested this month, the Thai government added to current supply a large tender of 3.1mt of rice from its stockpiles.
Still on the supply side, bearish news in other main growing regions did not manage to provide support to prices. In Indonesia, rice output for the year is now expected to reach 60.3mt in 2008, up 5.4% yoy, which may eliminate the need for imports. In the same vein, rice output in the Philippine for Q1 2009 is expected to rise by 6.4% yoy mainly thanks to expanded planted area.
In the export market, the export ban imposed by India on March 31st in order to boost supplies in local market and curb inflation will remain enforced. On the contrary, Burma has resumed its rice export after a 6-month ban following Hurricane Nargis. Still in Asia, even though Malaysia had signed the Free trade agreement with the United States, the government announced it would not open up its rice market.
Regarding outlook for rice in the short-run, with the bulk of the 2008 crop entering the market this month, a softening of rice price can probably be expected in the near future.
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Soft Commodities - Grain and Oilseeds \ Soybean
How long will China sustain prices?
Since our last release, soybean futures on the CBOT progressively declined yet amid some volatility. In the first 3 days of November, soybean prices surged by more than US¢34/lb, to US$9.5/lb on November 4th, the highest point for the month. The rest of the month saw prices gradually fall to hit US$8.4/lb on November 26th.
CFTC data for the October 28th-November 18th showed a renewed confidence from the bulls. Indeed for the first time since July, data revealed an increase in long non-commercials; while shorts slightly declined. As a result the net non-commercials as a percentage of open interest increased from 6.4% to 7.9%.
Forecast for a drop in soybean production supported prices in early November. In its latest release the USDA revised lower its forecast for major producers output. In the US, soybean production is now seen at 79.4mt compared to 79.9mt previously expected; while Brazilian output is now seen at 60mt, down from 62.5mt, on the back of a sharp dryness. Yet the world soybean output still remains higher compared to the previous year, at 235mt up 15mt yoy.
Though the effect was partially offset by global economic worries, US soybean exports surged this month. In its supply/demand report, the USDA indicated annual US exports to China have finally come back in line with last year level, at 450mt compared to 400mt last month. It seems yet that China remains the sole driver of soybean demand.
All eyes are now turned to China: A drop in the countries demand for soybean could weaken under the strain of tumbling crude oil prices and general concerns about recession, which has already severely cut soybeans’ demand.
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Soft Commodities - Grain and Oilseeds \ Wheat
Wheat found a balance between record crop and strong demand
Since our last release, wheat prices on the CBOT gradually decreased amid volatility. After having surged to US$5.7/bushel on November 4th, wheat futures on the CBOT kept hovering in a US$5.2-5.4/bushel range, before hitting the lowest point since May 2007 at US$4.9/bushel. Wheat prices finally finished the month a bit higher at US$5.3/bushel. European wheat futures saw less volatility, declining progressively to 133euros/tonne on November 21st, before rebounding slightly higher.
CFTC data for the October 28th-November 18th period showed a slight increase in long non-commercials; while shorts posted a 10,000 lots drop through the month. As a result, net non-commercials as a percentage of open interest climbed, closer to 0, at -0.5%.
Prospects for a record crop this season still weighed on the wheat market. In its latest report, the USDA indeed raised its forecast for the 2008/09 world wheat output at 682.3mt compared to 680mt forecast last month, mainly thanks to record crop both in Russia and in Europe.
Yet quite disappointing harvest in Australia and Argentina gave some underlying support to prices. Drought in Australia forced the USDA to cut its estimated output by 1.5mt, to 20mt.
Contrary to other soft-commodities, wheat demand resisted quite well to the crisis, with US exports recording a 7% increase yoy. On a global scale the International Grain Council raised its world demand estimate by a further 5mt, 37mt above last season’s level.
On the import market, wheat import demand was pretty strong this month, with for instance, Jordan floating a 150,000 tonnes wheat tender. Other large tenders also came from Syria, Iraq, Pakistan and Egypt. Yet, Russia more competitive prices tended to divert tender from US exporters, thus driving Wheat futures prices even lower.
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Soft Commodities - Tropical Products \ Coffee
Demand to remain high?
Amid volatility, coffee prices moved in opposite directions in November. After quickly surging to US¢125/lb on November 4th, Arabica prices slightly dropped to hit US¢118.3/lb on November 21st, before rebounding to US$122/lb on November 27th. Regarding Robusta, prices gradually climbed through the month to hit the highest point for the month at US¢91.3/lb on November 12th, before hovering around US¢90/lb and finishing at US¢95/lb. The Arabica-Robusta spread declined since our last release, dropping from US¢39.6/lb to US¢27.5/lb.
CFTC data for the October 28th-November 18th period showed a sharp decrease in long non-commercials; while shorts dropped less significantly. As a result, the net non-commercials as a percentage of open interest decreased to -7.8% from -5.9% last month.
On the Arabica market, the prospect for a bumper crop still weighed on prices. In Brazil, coffee output for the 2008/09 season is seen 30% higher yoy, at 49.7m bags. In Kenya, beneficial rains in main growing regions let producers expect a 77% increase in output in 2008/09.
On the export market, coffee demand seemed to remain high, with Brazilian exports up 6.7% yoy in October; while Vietnam recorded a 10% increase in October. Estimates for global coffee consumption this year forecast a 4m bags increase this year, to 128m bags.
On the Robusta market, supply news was quite mixed. While Vietnam is expecting a record crop of 20.9m bags this year, Indian output is seen 5% lower yoy mainly due to a month of strong showers.
Regarding the coffee market outlook, with a record crop expected for this year, coffee price orientations will mainly depend on whether coffee demand is going to be affected by the current crisis.
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Soft Commodities - Tropical Products \ Sugar
Sugar demand affected by the crisis
After a quick rebound above US¢12/lb in the first week of November, raw sugar futures in New-York declined to hit US¢11.4/lb on November 14th, before recovering slightly higher at US¢11.8/lb on November 26th. White sugar on the LIFFE mirrored the raw sugar move, first dropping to US$304/tonne on November, before significantly rebounding to US$333/tonne at the end of the month.
CFTC data for the October 28th-November 18th period revealed drops both for long and short non-commercials, which each decreased by 10,000 lots thorough the month. As a result, the net non-commercials as a percentage of open interest have remained quite flat since our last release, at 14.5%, down 0.8 percentage points mom.
Disappointing 2008/09 crops in major sugar producing countries provide some support both for raw and white sugar prices. In Brazil, sugar production in the main centre-south growing regions is estimated to be 6% lower compared to previous year on the back of wet weather delaying harvests. Late harvest also caused Indian sugar output to fall by an estimated 6mt this year, to 20mt. Other bullish news included forecasts for a lower Ukrainian beet sugar output and delayed harvest in the US.
Despite the sharp drop expected for 2008/09 output, the International Sugar Organisation (ISO) yet revised lower its forecasts for global sugar deficit, expecting the current economic difficulties will dampen demand for sugar. The ISO now forecast the global sugar deficit will reach 3.6mt, down 0.3mt from its previous estimate.
On the export market, Brazilian sugar exports benefited from the sharp fall in global freight rates. In October, Brazilian exports increased by 17.9% mom; while the share of Indian exports in the international sugar market declined.
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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
Regis Collieux; Oil, Oil refining, Petrochemicals, Fertilisers
Marco Boeri; Natural gas, including LNG
Sebastien Loison; Energy, Emissions & Product Development
Eric Louvert; Ferrous Metals
Morgane Kotecki; Commodity Markets
Giancarlo Fragomeno; Natural gas, including LNG
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