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January 30, 2009
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. All rights reserved.
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The Markets at a Glance -
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Energy - Crude Oil
Oil prices boosted by geopolitical concerns
Crude oil prices kept plunging until late December, before gradually recovering through January. After having hit their lowest level since December 2003, at US$30.8/bbl on December 22nd, WTI prices rebounded until the first week of January to hit US$48/bbl. Then WTI price slumped again below the US$40/bbl mark, before finishing at US$41/bbl on January 29th. Brent price showed less volatility, dropping to a 4-year low at US$33/bbl on December 24th, before recovering to US$49/bbl on January 6th and finally hovering the rest of the month in a US$41-47/bbl range.
The spread between both grades saw a lot of volatility since our last release, hitting a high US$7.5/bbl on January 1st, before plunging to –US$8.7/bbl on January 16th and finally settled close to 0 on January 29th.
CFTC data for the December 16th-January 20th revealed both an increase for long and short non-commercials, yet with a 38,000 lots jump shorts posted a stronger increase than longs. As a result, the net non-commercials as a percentage of open interest dropped since our last release, from 5.4% to 3.6% on January 20th.
Crude oil posted strong gains in January fuelled by news from the geopolitical front. The market became indeed somewhat nervous on the news that Israeli troops were entering the Gaza strip in early January, thus threatening stability in the Middle East, which accounts for one-third of the world’s oil production. Still on the geopolitical side, the Russian/Ukrainian dispute over gas prices settlement, which contributed in reducing natural gas shipments to Europe, also weighed on crude oil values in early January.
However, overall bearish macro-economic data prevented prices form surging further.
In the US, a report revealed that 525,000 jobs were lost in December, which constitutes the biggest collapse in employment since World War II. Out of the US, the IMF recently announced that China, the fastest-growing oil consumer, may miss is 8% growth aim in 2009, with a growth rate for 2009 in China now estimated at 6.7%.
Weak crude oil fundamentals also put a downward pressure on prices. The outlook for 2009 crude oil demand remained gloomy, with both the IEA and the OPEC revising downward their forecasts on the back of a stronger than expected step back in demand in OECD countries. In its latest monthly report, the OPEC forecast a 180,000 barrel reduction in oil demand in 2009, to 85.6mb/d, bringing this year’s reduction to 0.2%; while the IEA forecast a 0.6% drop in world demand to 85.3mb/d.
Still reflecting the lack of demand on the crude oil market, US inventories kept on racing to record high level this month. Indeed, since our last release crude oil inventories posted a 6% increase to 338mb; while gasoline and distillates climbed by 12mb and 8mb respectively, bringing them all at or above the 5-year range.
On the supply-side, some support came form the news that Angola, Libya, Nigeria and Ecuador will support the Saudi Arabian effort to effectively cut output. In the same vein, Kuwait and Qatar indicated they will implement supply cuts decided at the last month’s OPEC meeting in Oran.
Should crude oil prices fall further in the short-run, OPEC members may decide another output reduction at their next meeting scheduled in March. Until then we can still hope for a price rebound fed by the speculation of a new bank-rescue plan from President Barack Obama.
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Energy - European Refining Margins
Surprising refining margins strength in January
During the past six weeks, refining margins remained at relatively healthy levels on average, which contrasts surprisingly with macroeconomic evolutions. However, they have experienced regular downturns testing new lows each time. Thus, beside this apparent positive picture, refining margins have pursued their erosion.
Our NWE Brent cracking gross margin indicator stood at USD 6.7/bbl on January 29th slightly above its December 18th level (USD 5.2/bbl), but it has dropped to USD 2.6/bbl on January 23rd. Our NWE Brent hydroskimming indicator followed the same pattern, increasing from USD 4.6/bbl to USD 5.4/bbl, testing USD 1.7/bbl. Our Urals gross margin indicators appeared more resilient, staying continuously above their initial level. Cracking indicator increased from USD 3.8/bbl to USD 5.4/bbl while our hydroskimming indicator increased from USD 1.5 to USD 3.9/bbl. Quarter-to-date averages showed a slight decline compared to Q4 2008 for NWE Brent margins. NWE Urals margins had registered better results, noticeably for simple refineries.
NWE refining margins have been supported by a recovery of light and heavy products crack spreads. Gasoline (regular 10ppm FOB barges NWE) crack remained weak till the end of December falling as low as USD 11/mt, but it has recovered in January, reaching USD 89/mt on January 29th. Naphtha crack spread recovered even more, surging from a low of USD 41/mt to USD 55/mt. HSFO 3.5% (FOB barges NWE) crack spread also contributed positively to refining margins, reaching its highest level since October 2003 at USD -80/mt. Beside those favorable evolutions, middle distillates crack spreads pursued their erosion: ULSD (10 ppm FOB barges NWE) crack declined from USD 165/mt to a low of USD 105/mt, jet fuel (FOB barges NWE) from USD 165/mt to USD 111/mt and heating oil (0.1% FOB barges NWE) from USD 143/mt to USD 77/mt.
Refining margins appeared relatively resilient to the deterioration of their economic environment and the drop of demand. The International Energy Agency indicated in its last monthly report a sharp drop of world oil demand during Q4 2008 (-2.2% or -1.9 mbd). Demand would have dropped on the two sides of the Atlantic Basin (-5.1% in North America and -2.9% in Europe). All products would have registered a decline: -3.7% for gasoline, -9.4% for naphtha, -10.0% for jet fuel, -2.4% for gasoil and -5.5% for fuel oil. It seems that NWE refining margins have been supported by demand for storage encouraged by the contango configuration of the current market and by some demand from Asia following some refinery closures in this region.
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Energy - US Natural Gas
Looking for a floor
Over the period December 19th, 2008 (date of our last publication) to January 29th, 2009 Henry Hub gas prices have evolved in a range included between a maximum of US$ 6.1/MMBtu (on January 6th) and a minimum of US$ 4.62/MMBtu (on January 26th), for an average price of US$ 5.26/MMBtu (34% lower than the average price of US$ 7.96/MMBtu over the same period in 2008).
Henry Hub remained pretty flat over the last two weeks of the year, ending 2008 slightly above 5.6 US$/MMBtu on the back of low temperatures during the Christmas break. In January 2009, triggered by a colder snap, prices started to increase sharply throughout the first week, peaking on the 6th above the 6 US$/MMBtu threshold. From the 6th to the 29th prices kept falling, losing 21% in 12 days and settling at 4.82 US$/MMBtu. The financial and economic crisis that hit badly the US began to weigh more heavily on its gas industry, notably in the industrial and power generation demand ( -16% and -7% respectively y-o-y estimated by EIA in January).
In January the Nymex gas futures open interest moved back to 2006 levels, with a low on January 4th at 671 730 outstanding contracts, settling at 704 924 on January 25th, 21% down y-o-y. Non commercial market operators continued to be predominantly short (219 809 short positions vs. 73 988 longs as of January 25th) as milder temperatures expected during the coming month would likely exacerbate the fall in prices. The 6 month forward curve has lost on average 23% compared to last month prices, and 33% compared to October 2008, keeping on posting higher prices for spring expiries. The front month (March) price settled at 4.58 US$/MMBtu as of January 29th, loosing 1.52 US$ in a month, although this winter to date has been 9% colder than last year.
As of January 29th, according to EIA, working gas in storage was 2,374 Bcf, with a net withdrawal of 646 Bcf since our last publication. Current working gas storage volumes are 29 Bcf above the 5-y average and 34 Bcf higher than 2008 levels. During the month US gas storage continued to decline at a slower pace compared to the average for the period. The contraction in the industrial production and the related power usage slump made the recourse to storage tapping less necessary.
Consistently with the gas market situation, US drilling activity fell dramatically, settling at 1185 rigs as of January 23rd, more than 13% down since our last publications. Market prices are evolving below marginal costs and more expensive fields have been obliged to shut in, waiting for more profitable times. Canadian drilling activity rose strongly in January, marking a 19% increase since our last publication, settling at 287 rigs. Despite the traditional seasonal winter rebound, on a y-o-y basis the number of rigs at work is 17.5% lower than in 2008.
In January, US non-weather-sensitive industrial and power generation gas demand should more than offset weather-sensitive gas demand growth (residential demand is expected to increase by more than 3% compared to Jan08 due to the current cold snap). With gas prices more under-reactive to weather conditions than possibly expected, HH prices will likely continue to hover between 4.5 and 5.5 US$/MMBtu in the short term. The 4 US$/MMBtu threshold could be broken downwards next spring, if cold weather does not persist and the injection season starts with a gas storage surplus.
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Energy - Emissions
Deeper in the doldrums
EUA and CER Markets
The end of 2008 and the very beginning of 2009 saw minimal trading activity due to the Christmas and New Year holidays. Yet as from January 08, new gloomy forecasts about shrinking industrial production have naturally weighed heavily on emissions prices, with Dec-09 EUAs reaching an all time low of €11.5 on January 21. The price falls mark a loss of approximately 27% for EUAs over the past few weeks - in tandem with the moves in oil. Dec-09 EUAs were within the €15 – 16 range at the start of the year before breaking out to the downside on January 8 and finally closing at 11.88€/tonne on January 29 while DEC09 CERs edged down to 10.44€/tonne.
Key recent developments in the carbon market have been the dramatic margin erosion between primary and secondary CERs, from levels of ~ €5 - €6 down to current levels of €1 - €2. This has made the guaranteed factor of secondary CERs far more appealing than the risk factor associated with primary CERs. In addition there has been an increased interest in the carbon market from Japan due to the strength of the Yen (over the Euro) making cheaper CERs even more economically attractive buys.
Regulatory Issues
The big news here came from the US where President Obama begins one of the most complicated jobs at one of the most challenging times in modern history. It is of course too early to say how and whether he will comply with his climate and clean energy pledges, but it is clear that his administration is already making the right moves. First of all Mr Obama has chosen Cabinet members with very strong environmental credentials who are highly committed to tackling climate issues such as Lisa Jackson (who takes on the head of the EPA) and Dr. Steven Chu (Secretary of Energy). Even members of the cabinet with no direct environmental role such as Hilary Clinton have publicly stated the need for a coordinated international response to climate change and the importance of America leading those efforts.
The American Recovery and Reinvestment Bill (to be considered by the US House of Representatives over the next two weeks) includes $50bn on clean energy investment. Mr Obama considers the country’s energy shortcomings as a huge opportunity for job creation and reshaping the economy. A Democrat-dominated Congress should facilitate the approval of this aspect of the bill as well as the enactment of other environmentally friendly legislation.
Even though the president’s goals are ambitious (e.g. doubling output of alternative energy over the next three years) they are achievable and could indeed reactivate and transform the US economy. It is undeniable that Mr Obama faces great challenges ahead but he has started the journey with determination and remained true to his campaign rhetoric.
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Energy - Coal
Lukewarm perspective for coal
Since our last release, CIF ARA thermal coal hovered in a US$84-87/tonne range until mid-January, when ARA coal prices started to drop slightly to hit US$68/tonne, before recovering to US$75/tonne at the end of the month.
The Christmas break period did not show a lot of activity both on the Atlantic and on the Pacific market. Yet a series of bullish factors in early January put an upward pressure on Richards Bay prices, which surged to US$83/tonne on January 6th, up US$7/tonne since December 19th. Among these factors, political tensions in Middle Eastern countries as well as the gas dispute between Russia and Ukraine managed to sustain coal prices. The Atlantic coal market also benefited from below average temperature in European countries, fostering buying activity.
Freight rates provided mitigated support to coal prices, with the Baltic Dry Index slightly recovering from its 22-year low hit last month, at 663, to 900 in late January.
However, with warmer weather in Europe and shying away Indian buyers on the back of too high South African prices, Richards Bay coal prices edged downward in mid-January to US$65/tonne.
The Russia/Ukraine gas dispute also weighed on Newcastle coal prices, which climbed by US$7/tonne to US$88/tonne on January 7th. Indonesian renewed interest for Australian coal also fed this prompt rally in Pacific coal prices. Yet, ample stocks in Northwest European ports combined with weakening demand in the last two weeks of January fuelled the decline, dragging Newcastle coal price toUS$69/tonne on January 22nd. In Asia, however, a renewed activity at the end of January dragged Pacific prices to US$82/tonne.
On the coking coal market, while US producers and domestic customers have already settled their contract prices for the current calendar year, at US$135/tonne, Australian coking coal producers are currently discussing conditions with their Japanese customers.
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Energy - European Power
European power prices surged on low temperatures
In the first month of 2009, European power prices were slightly lower than prices covered by our last release (until December 19th). However, except for France, European baseloads posted increases on a year-on-year basis. Despite a quite strong volatility on power markets, European power prices traded in the same range, with baseloads hovering in an average of 61-63euros/MWh.
Contrary to our last release, the German baseload saw a lot of volatility in January, surging by 45 euros/MWh in the first 15 days of the month to 86euros/MWh, before dropping to finish at 62euros/MWh on January 30th. German power prices bullishness at the beginning of the month has mainly to be put on the back of a strong cold weather wave in European countries. Yet, above average levels of wind power production as well as a drop in industrial demand helped prices to ease in the second part of the month.
UK power prices saw the strongest rally, with the UK baseload skyrocketing from GBP47/MWh (51euros/MWh) to GBP137/MWh (149euros/MWh) within only 4 days. A gas dispute between Russia and Ukraine over gas, which led to a complete cessation of Russian exports to Europe, drove UK price to this staggering rally. Adding to this, numerous unplanned outages and maintenance extensions were reported at a moment when temperatures fell well below their average levels. From January 10th, prices dropped to GBP50-85/MWh (55-92euros/MWh) thanks to the restart of 1GW nuclear capacity and easing concerns over gas supply from Russia.
The cold snap also hit France, thus dragging the French baseload to a high 90euros/MWh on January 9th. However, healthy nuclear production and hydropower reservoirs as well as rising temperatures helped to put a downward pressure on French power prices through the rest of the month.
On the forward curve, evidences of a deepening recession in European countries made them felt, with forward power prices significantly dropping through January.
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Metals - Non-Ferrous Metals \ Alumina
Alumina prices pressured by lacklustre demand
Alumina prices on the international market are now listed at US$185/tonne, a US$40/tonne drop since our last release on December 19th. On the Chinese market, after having decreased by 10% to RMB1,775/tonne on January 8th, alumina prices then rebounded to finish at RMB1,875/tonne.
Again this month Nalco’s latest 30,000 alumina tender reflected the bearish mood on the alumina market. Whereas last month tender was won at US206/tonne, this month, the Indian trading company, Vista Comtrade, made the best offer at US$194/tonne.
Indeed, the alumina market still remained affected by low demand for the aluminum sector, which currently faced strong output reduction amid tumbling LME prices. In latest news, indeed, Shanxi Guanlu announced it planned to idle one third of its total aluminum smelting capacity, equivalent to 40,000 tpy; thus forcing major Chinese alumina producer to slash output. In this regard, the industry giant, Chinalco, reduced its production by 720,000 tonnes, which accounts for 18% of its total capacity.
Still in industry news, Alumina partners of Jamaica Ltd (Alpart), Jamaica’s largest alumina producer, curtailed by up to 50% its alumina production, as a direct response to lacklustre demand from the aluminum sector and plummeting alumina prices.
Given current gloomy prospects for the base metal complex for 2009 and current output reduction on the aluminum market, it seems alumina prices will continue to be dragged downward and further production cuts can also be expected.
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Metals - Non-Ferrous Metals \ Aluminum
Aluminum in quite a bad shape
After having gradually dropped in the first part of December, cash aluminum on the LME bounced back later in the month, to reach US$1,574 on January 17th. Aluminum prices then dipped again to hit US$1,289/tonne on January 23rd, the lowest level since October 2002, before finishing at US$1,308/tonne. Except on January 15th, when it hit the 0, the 3mth-cash spread remained globally entrenched in a US$30-45/tonne contango.
Tumbling demand for the grey metal still widely offset the effort to reduce oversupply on the aluminum market. Indeed, aluminum prices were again undermined by low demand from the US automotive industry, which saw its US sales tumbling by an average of 38% in December.
Poor demand brought, as a result, LME inventories to new record high level, going past the June 1994 record. Since our last release, grey metal inventories indeed surged by 30%, to 2.7mt.
Reflecting the dire situation for aluminum, new cuts were announced this month to address market conditions. Alcoa announced a third output cut of 135,000 tonnes, effective by the end of Q1 2009, which would bring the total reduction in primary aluminum to 750,000 tonnes, equivalent to 18% of its annualized production. In the same vein, Shanxi Guanlu is about to cut its aluminum production by 36%, equivalent to 40,000 tpy, on the back of low international prices.
Yet, despite these efforts to adjust output the China Nonferrous Metals Industry forecast that the aluminum market will remain in surplus this year. It is indeed estimated that much more than the 8% of global production cut announced to date are required to affect the market.
With a gloomy outlook for aluminum demand, we can expect further price drop on the aluminum market this year but also further production cuts.
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Metals - Non-Ferrous Metals \ Copper
Copper up 25% in early January
Cash copper on the LME fell to a 4-year low on December 24th, before posting a strong 25% increase to US$3,342/tonne on January 16th. The rest of the month saw copper prices hovering in a in a US$3,150-3,330/tonne range. The 3mth-cash spread showed a lot of volatility, surging to US$150/tonne in late December, before hitting a low –US$5/tonne on January 19th.
CFTC data for the December 16th-January 20th period highlighted the lack of confidence of copper bulls’ on the market. Indeed, since our last release, short non-commercials recorded a major 17% increase, to 323,000 lots; while longs dropped by 2,500 lots. As a result, the net non-commercials as a percentage of open interest dipped further, from -25% to -30.3% at the end of January.
Despite weak demand from the international market, copper on the LME was strongly supported by a surge in Chinese demand encouraged by a favourable LME/Shanghai arbitrage. Besides, a strong stockpiling activity ahead of the Chinese New year was also a reason for this surge in Chinese demand. Latest Chinese data revealed that Chinese import climbed by 32% mom in December; yet posted a 5% slump on a year-on–year basis, thus reflecting a sharp slowdown in activity.
This month again, copper inventories kept rallying to the record level of December 2007. Since our last release, copper inventories on LME rose by 40% to more than 450,000 tonnes.
On the supply-side, a series of bullish news were release through January. Indonesia is indeed reported to have produced 27% less production mainly on the back of lower output at PT Freeport Indonesia. In Chile, Rio Tinto revealed that production at its Escondida mine fell by 41% in Q4 2008 due to declining ore grades and electrical failures at a mill.
Still on the supply-side, new output reductions were announced in January in a view to support copper prices. In this regard, Mitsubishi Materials announced it would cut output by 10%, shutting its Naoshima smelter in Japan for maintenance from February 22nd. In Canada, Campbell Resources Inc. shut all mining operations at its Copper Rand mine in Ontario from December 31st.
On the export market, the Chinese government recently announced the suppression of the import tax of copper concentrate. The decision, which will be implemented on February 1st, could again boost Chinese copper demand and thus sustain international copper prices.
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Metals - Non-Ferrous Metals \ Lead
Demand providing short-term support
After having hit its lowest point since August 2005, at US$877/tonne on December 22nd, cash lead on the LME surged by 35% within 14 days, to reach US$1,182/tonne before dropping barely above the US$1,000/tonne mark and finally rebounding to US$1,144/tonne on January 29th. The 3mth-cash spread fluctuated between contango and backwardation thorough January, but settled close to 0 at the end of January.
Contrary to other base metals on the metal complex, lead benefited from a seasonal increase in demand from battery makers; which fed the price rally in late December. The health of the sector can however be questioned with operating rates in Japan, the world’s largest battery producer, at just 50% of capacity. Besides, the picture for global lead demand in H1 2009 is quite gloomy, with demand expected to rise by 1.3% yoy this year from 3.4% yoy in 2008.
Regarding stocks, LME inventories posted new gains since our last release, climbing by 13%, to more than 50,000 tonnes.
On the supply-side, lead producers still responded to deteriorating demand by cutting output. The latest reported cut came from the St Louis based company, Doe Run Co., which slashed its production by almost 17% for 2009. Yet, the latest released data for the International Lead and Zinc Study Group forecast the lead forecast to remain in a surplus of 8,000 tonnes in 2009.
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Metals - Non-Ferrous Metals \ Nickel
No improvement from the stainless steel sector
Since our last release, on December 19th, cash nickel on the LME surged by almost 40% within two weeks, to reach US$13,417/tonne on January 6th, before tumbling to barely US$10,000/tonne and finally settling at US$10,982/tonne on January 29th. The 3mth-cash spread globally remained in contango, except on January 14th when the spread dipped to a negative –US$5/tonne.
This rally in nickel prices can mainly be attributed to a rebalancing of commodity indexes in early January, which thus gave a strong support to nickel prices.
Yet, the nickel market also benefited from a prompt surge in nickel demand from China. It seemed indeed that the Chinese stainless steel sector benefited from a renewed activity, compared to the lacklustre situation known in November/December 2008.
Yet, outside of China, demand for nickel still remained quite bleak as stainless production of major producers, such as Japan, are running well below capacity. Besides, outlook for nickel demand for 2009 do not reveal any improvement in the current market situation, with global demand forecast to be 1.8% lower yoy in 2009.
This lack of demand thus weighed on LME inventories levels, which have risen significantly since our last release from 74,000 tonnes to 82,000 tonnes at the end of January, the highest level since July 1995.
In industry news, supply adjustments were still progressing through January. In this regard, Eramet announced a 50,000 tonne output reduction at its Doniambo nickel smelter in New Caledonia; while South Korea’s POSCO said it will extend its output cuts through Q1 2009. In Australia, BHPB announced the suspension of operations at its Ravensthorpe nickel facility for an indefinite period.
Even if efforts are being made to adjust supply and demand on the nickel market, it seems that output reduction will have trouble to offset the expected slump in the metal’s demand. As a result, the nickel market is expected to reach a 18,000 tonne surplus in 2009, according to Brook Hunt estimates.
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Metals - Non-Ferrous Metals \ Tin
A shy rebound in tin demand
After having dropped below the US$10,000/tonne mark just before our last release, cash tin on the LME recorded a sharp rally to reach US$12,150/tonne on January 6th. Then tin prices dropped back close to the US$10,000 mark, before promptly rebounding above US$12,000/tonne but finally finishing at US$10,850/tonne on January 29th. Since our last release, when it reached –US$500/tonne, the 3mth-cash spread rebounded to settle now close to 0.
After having known a “horrific” month in December, the tin market fared quite better early January supported by a prompt rally in equity and commodity markets.
Yet, fundamentals on the tin market still remained weak. Indeed while Indonesian tin exports dropped by 15%, to 4,000 tonnes, in December; forecasts for January are seen at 3,800 tonnes.
As a result, LME stocks surged in January, climbing 14% through the month, to 8,600 tonnes.
Amid lacklustre demand for tin, the South-Korean government decided to buy 200 tonnes of refined tin from a local trading company in order to increase its stockholding of key metals but also to sustain activity.
In industry news, most of independent Indonesian tin producers, which shut operations in October on the back of poor demand, are forced to delay the re-start of their operations because of low prices and bad monsoon weather. In Bolivia, Vinto is currently reactivating two furnaces with a total capacity of 1,000tpm in an effort to boost Bolivian tin production.
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Metals - Non-Ferrous Metals \ Zinc
The zinc market still seen in surplus despite strong adjustments
Between December 19th and January 7th, cash zinc on the LME experienced a bullish ride, surging by more than 19%, to US$1,288/tonne. Zinc prices then gradually declined through January to finally finish at US$1,077/tonne on January 29th. After surging to US$47/tonne, the 3mth-cash spread finally settled lower at US$26/tonne at the end of January.
Though LME inventories posted a 36% rally since our last release, cash zinc rallied until the first week of January. The surge was mainly sustained by news China’s government bureau will purchase 59,000 tonnes of zinc by March 15th at RMB11, 800/tonne, while the current price is at RMB11, 250/tonne.
Yet, global demand for zinc remained particularly weak on the international market, thus leading to further output reductions. In this regard, Volcan Cia Minera announced it had closed down operations at its 140,000tpy mine in Peru, while OZ Minerals suspended one of two mines at its Golden Grove operations in Western Australia. The latest cut will reportedly reduce output by 25,000 tonnes in 2009.
In Australia, Xstrata could be forced to shut its 350,000tpy McArthur River mine, if the Australian government does not issue a permit to allow the re-start of activities. On December 17th, Xstrata suspended operations due to a court ruling on the validity of the original approval of the mine.
However, despite these efforts to adjust output, the zinc market is expected to remain in surplus in 2009. In its latest report, the International Lead and Zinc Study Group (ILZSG) reported the zinc surplus was 134,000 tonnes for the 11 month of 2008; and the surplus in 2009 is expected to reach 267,000 tonnes according to Brook Hunt estimates.
On the import market, after having abolished the tax last year as a part of the fight against inflation, India has decided to reintroduce a 5% customs duty on zinc import from January 2nd in a view to ease conditions for domestic zinc producers.
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Metals - Ferrous Metals \ Iron Ore
Is Chinese demand picking up?
After having slightly dropped until late December, spot prices for Indian iron ore CFR China rebounded in January to settle again above the US$80/tonne mark, at US$81.5/tonne.
After having temporarily cut their production, Chinese steel mills resumed operations in December, thus giving a boost to iron ore import demand. China’s December iron ore imports indeed climbed by 6.2% mom. As a result, export price for Indian iron ore benefited from a slight rebound in freight rates in early January, with the freight charge from India to China climbing by US$2/tonne.
As a result, confidence seems to regain Indian iron ore exporters, who increased their offer prices in January, betting on a demand revival in China after the Chinese New Year holiday, at the end of the month.
On the Pacific market, despite still week demand for Australian ore, Rio Tinto, resumed operations at its Pilbara mine in Australia after a 2-month shutdown.
Regarding negotiations for 2009 iron ore price settlement, talks have officially started this month, in a context of a sharp economic slowdown and lacklustre demand for steel. As a result, attention will mainly be focused on how Chinese demand will be impacted by the crisis. Yet, it seems it will take time for both sides to assess the extent of the current recession on the steel market.
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Metals - Ferrous Metals \ Steel
Prompt rally but no significant pick up in demand
Except for US HRC import, steel prices have posted gains since our last release dragged upward by a slight rebound in buying activity.
In the US, HRC import prices dropped from US$550/short ton to US$475/tonne at the end of January, on the back of tumbling demand from the US automotive sector, whose sales dropped again by 40% in December. Data release for December indeed revealed US steel imports dropped below the 2mt mark, whereas US imports recorded an average of 2.5mt in the first 10 months of 2008.
In China, HRC export prices climbed in January, from US$525/tonne to US$580/tonne, dragged upward by a few reported bookings ahead of the Chinese New Year, starting January 26th. Yet, China still faced poor demand from foreign buyers as Chinese HRC prices remained quite uncompetitive compared to HRC from CIS origin (US$355/tonne). As a result, we can expect the export price for Chinese HRC to drop in the short-run, in order to attract new bookings.
On the long products market, export prices gently firmed sustained by some bookings and confidence in a renewed interest for CIS billet. In this regard, the export price for CIS billet increased by US$30/tonne to US$395/tonne, supported by orders from the Persian Gulf, Italy, North Africa and Iran.
On the Turkish rebar market, demand from Persian Gulf buyers remained extremely low, yet prices benefited from the support of the 30% production cut, which have been implemented a few months ago. As a result, rebar prices increased from US$455/tonne to US$505/tonne. Demand is not expected to resume before 2 or 3 months, as there are still up to 800,000 tonnes of steel waiting to be cleared from Middle Eastern ports.
Regarding the outlook for the steel market in 2009, we can expect poor performances in the automotive and construction sectors, which would thus affect steel demand.
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Soft Commodities - Fibers \ Cotton
Prompt rally in the cotton market
Cotton futures in New-York gradually climbed through late December and early January, to reach US¢50.4/lb on January 8th, before declining to US¢46/lb and finally finishing higher at US¢51/lb on January 29th.
CFTC data for the December 16th – January 20th period highlighted the rally in cotton futures prices. Indeed long non-commercials climbed by 1,000 lots, shorts dropped from 25,300 to 21,500 lots. As a result, the net non-commercials as a percentage of open interest increased since our last release, from -1% to 3.4%.
After months of almost dead demand, the US demand market benefited from strong export demand in early January encouraged by a weaker dollar. It is indeed estimated that more than 226,000 bales were shipped in the first week of January compared to 67,900 bales in the same period last year.
Bullish fundamental news also provided underlying support to cotton prices. On the supply side, 2008/09 cotton harvest is seen sharply lower compared to previous estimates. In its latest report, the USDA cut its forecast for US cotton production by 0.5m bales, to 13m bales; while India, the second largest producer, saw its output cut by 1m bales, to 23m bales forecast in January.
Yet on the long run, bullish supply can be offset by deteriorating demand from the textile industry. Despite this prompt increase in cotton demand in January, cotton exports through 2009 are expected to drop to 31m bales, their lowest level for the last 6 years. Amid the worst performer, China’s imports are forecast to be 10% lower yoy.
The 2009 picture for cotton is quite mixed, with both disappointing harvests and poor demand forecasts. As a result, cotton price direction will be determined by the health of the textile industry this year.
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Soft Commodities - Fibers \ Pulp & Paper
Exceptional rebound in Chinese demand
Pulp prices experienced a sharp correction in January, with NBSK delivered to Western Europe recording a 20% slump, from US$780/tonne to US$620/tonne. BEKP prices delivered to the same area underwent a less extreme drop, tumbling by 14% to 484 euros/tonne. Since our last release, in November, the NBSK-BEKP collapsed into negative territory to reach a low –US$56/tonne on January 2nd, before rebounding to -US$16/tonne at the end of January.
As expected pulp global shipments fell in December, yet a rebound in Chinese demand managed to offset the sharp drop in North America and in Europe. As a result, world pulp shipments in December slipped by 4.8% yoy, dragged downward by poor demand from Western Europe (-11.2 % mom) and North America (-13.5%), but largely supported by a strong 53% yoy increase in Chinese demand. Regarding demand allocation, hardwood benefited from the surge in Chinese demand, with hardwood shipments up 11% yoy; while softwood posted a 4.8% drop.
In December, pulp inventories declined compared to November’s level, from 50 days of consumption to 46 days. This slump was mainly driven by hardwood inventories, which dropped to 53 days of consumption, down 7 days from November’s level. On the other side, softwood inventories climbed by 1 day of consumption, to 41 days. As a result, pulp inventories are estimated to have dropped by 300,000 tonnes in December.
Given the currently still high inventory level (10 year average=32 days), the negative demand growth expectations and the likely insufficient supply cut, prospects for a price recovery are quite gloomy. As a result, we can expect further price drops in the pulp market in the short-run.
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Soft Commodities - Grain and Oilseeds \ Corn
Disappointing US export sales
Since December 19th, corn futures on the CBOT climbed by almost 13% to US$4.3/bushel on January 6th, then corn prices started to decline before finally finishing the month of January at US$3.8/bushel.
CFTC data for the December 16th-January 20th period showed both long and short non-commercials climbing from barely the same amount, to 162,000 and 114,000 lots respectively. As a result, the net non-commercials as a percentage of open interest remained quite unchanged since our last release, at 5.9%.
Corn futures bullishness in early January has mainly to be put on the back of a prompt surge in crude oil prices as well as bullish planted area forecasts. Analysts indeed projected that US planted acreage next would drop by 3.7m acres, to 82.2m acres.
Weather concerns in South-American growing countries also provided underlying support to corn prices. Brazil and Argentina were hit by unusual hot and dry weather, thus putting in jeopardy the current harvest. As a result, the USDA lowered its estimate for 2008/09 Brazilian and Argentinean corn output by 2mt and 1.5mt from its previous estimate.
However, bearish forecast for 2008/09 Chinese output quite offset this South-American bullish supply news. Indeed, in the latest USDA supply/demand report, Chinese output forecast was revised upward, from 160mt to 165mt expected for the 2008/09 season.
The demand side did not provide any support to corn price, with quite disappointing US exports sales figures in January. In this regard, 2008/09 US export sales estimates were lowered in the latest USDA report, to 44mt expected for this season, down 16mt compared to the 2007/08 season.
Given the bearish outlook for world corn demand this year as well as the prospects for a bumper crop in China, we can thus expect further price fall on the corn market. However, bullish support can still come from continuing weather issues in south-America.
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Soft Commodities - Grain and Oilseeds \ Rice
Prices sustained by poor weather conditions
Since our last release, the export price for Thai rice 100% grade B gradually climbed from US$530/tonne to US$585/tonne at the end of January.
Thai rice prices were mainly supported by unusual cold weather in main growing regions in early January, forcing producers to postpone harvest for two weeks. It seems yet, that the crops have not been affected by the poor weather conditions.
Regarding rice fundamentals, nothing seemed to justify this increase in the rice benchmark. Rice fundamentals remained indeed quite bearish. In its January supply/demand report, the USDA revised higher its forecast for the 2008/09 season to 439mt, up 4.5mt compared to December’s forecast, on the back of higher than expected harvest in China.
As far as demand is concerned, estimates are quite pessimistic, with Pakistan to have reportedly not received any orders for the last two months.
Data from the export markets were bearish as well, with Indian rice export dropping by 1.6mt yoy. As a result, the Indian government recently decided to scrap its UIS$200/tonne export tax on basmati rice as well as to cut the floor price for overseas sales in a bid to increase Indian rice competitiveness.
Still on the export market, Indonesia is looking to enable rice exports. The country, which has already reached self-sufficiency, is likely to export up to 1mt of rice in 2009.
Weather conditions in Thailand as well as harvest progress should give prices a clearer direction in the next few weeks. However, given current bearish fundamentals, it seems international rice prices will not experience a strong rally in the short-run.
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Soft Commodities - Grain and Oilseeds \ Soybean
A bull run for soybean prices
Since our last release, soybean futures on the CBOT posted strong gains, rallying by 20% to the highest point for the period at US$10.4/lb on January 9th. The rest of the month saw soybean prices hovering in a US$9.7-10.9/lb range.
After several months of steep drops, CFTC data for the December 16th-January 20th period, revealed a strong rebound in long non-commercial positions and, on the contrary, a sharp drop in shorts. As a result, the net non-commercials as a percentage of open interest increased significantly since our last release, from 6.7% to 11%.
Soybean prices benefited from a series of bullish fundamental news. On the demand side, solid export demand for US crops provided underlying support to soybean prices. The USDA, indeed, estimated that total weekly export sales reached 512,000 tonnes for the week ending Dec 25., up 2,000 tonnes yoy. This prompt rally in soybean demand was dragged by China in particular, which pilled new stocks ahead of the Chinese New Year holidays, starting January 26th.
Weather issues were also a bullish factor in January. Brazil and Argentina have faced the most severe drought for the last 30 years, thus raising concerns over outputs of these two major soybean producers. In this regard, the USDA has already cut its forecast for the Argentine 2008/09 output by 1mt, compared to its previous estimate of 50.5mt. As a result, it also lowered its estimates for 2008/09 world total output by 1.4mt, to 233.2mt.
With disappointing crops expected in Brazil and Argentina, the world’s second and third biggest soya producers, we can expect international demand to turn to US crops thus boosting US soybean prices. Yet, the size of the Chinese appetite for soybean will also weigh a lot on future soy prices orientation.
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Soft Commodities - Grain and Oilseeds \ Wheat
Wheat rallying on strong export demand
Wheat futures on the CBOT recovered in late December after having tumbled below US$5/bushel at the very beginning of the month, rallying to US$6.4/bushel on January 6th. Then CBOT wheat started their decline to US$5.7/bushel on January 22nd, before slightly rebounding to US$5.8/bushel at the end of the month. European wheat futures experienced a more bullish ride, surging by 15% since our last release to 150euros on January 29h.
CFTC data for the December 16th-January 20th period highlighted both increases in long and short non-commercials. Yet, while longs jumped by 1%, shorts recorded a strong 17% increase. As a result, the net non commercials as a percentage of open interest severely dropped from -2.6% to -6.2% since our last release.
Wheat prices were largely supported by an active international import market, with a reported 500,000 tonne tender for Pakistan and Saudi Arabia and 300,000 tonne for Morocco. In early January, Egypt also floated a 55,000 tonne tender of US soft red wheat. However, US wheat exports are still facing competition from Black sea suppliers, despite lesser quality.
On the supply-side, the wheat market benefited from quite mixed news. Indeed, output forecast for 2009 are quite optimistic with good harvest expected for India thanks to favourable climate conditions. However, bullish support came with the news of planted acreage cut by one-third in Arkansas compared to previous season as well as a general drop in yields forecast for 2009.
Regarding export policies, India is currently reviewing its export ban on wheat. With high stocks and an expected bumper crop for a second consecutive year in 2009, the Indian government would be willing to remove the ban by March, thus enabling traders to sell wheat outside India for the first time in two years.
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Soft Commodities - Tropical Products \ Coffee
Coffee rallied on bullish fundamentals
Since our last release both Arabica and Robusta prices followed the same trends. Arabica prices slightly dropped to US¢117/lb on January 5th, before rebounding to US¢134/lb at the end of the month. Robusta prices experienced the same variations, dropping to US¢78/lb on January 5th, before recovering to US¢85/lb on January 29th. The Arabica-Robusta spread posted strong gains, climbing by 30% to US$49/tonne.
CFTC data for the December 16th-January 20th period highlighted a sharp increase in long non-commercials, from 18,000 to 26,000 lots, while shorts posted more moderate gains. As a result, the net non-commercials as a percentage of open interest crossed the 0 mark, rallying from -8.5% to 2.4%.
Bullish supply-side news put an upward pressure on the Arabica market in January. Indeed, recent estimates foresee Brazilian 2009/10 harvest to be up to 20% lower, to 40m bags, compared to the previous season, on the back of the biennial nature of coffee trees that sees a bumper crop followed by lesser output in the following year. Besides, both the USDA and ICO are expecting production losses in major South-American producing countries due to climate changes.
On the demand side, news were more mixed, with Brazilian exports to have reportedly jumped by 9% mom in December; while Guatemala and Honduras saw their exports dropping by 10% and 2.9% mom respectively in December.
On the Robusta market, poor weather forecasts in Vietnam, the world’s second largest Robusta producer, provided underlying support to Robusta prices in January. In this regard, the USDA lowered its estimate for Vietnam 2008/09 output to 19m bags, down from 21m bags.
According to first estimates from the ICO, the coffee market is expected to reach a 5m bags deficit for the 2009/10 season.
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Soft Commodities - Tropical Products \ Sugar
Bullish fundamentals on the sugar markets
On the sugar market, both grades followed the same upward pace in January. While raw sugar in New-York climbed by almost US¢2/lb, to US¢12.8 on January 29th; white sugar on the LIFFE posted a 20% increase since our last release, finishing at US$369/tonne at the end of January. Since our last release, the margin between white and raw sugar widened to settle at US$91/tonne.
CFTC data for the December 16th-January 20th period highlighted a sharp increase in long non commercials, while shorts steeped back. As a consequence, the net non-commercials as a percentage of open interest increased by 3 percentage points since our last release, to 17.2%.
In early January sugar prices benefited from a prompt rally in crude oil markets, which triggered a renewed interest for ethanol, and was supported as well by a weak dollar.
Besides, bullish fundamentals also weighed on sugar prices. On the supply-side, the Kenyan output is reported to have slumped by 19.2% in the last quarter of 2008 on the back of poor weather conditions. On a global scale, prospects for 2008/09 sugar output are quite pessimistic, with lower production expected in Asian countries and still huge amount of Brazilian cane going to ethanol.
Demand forecasts also followed a bullish ride, as India is expected to turn into an importing country and forecasts for European Union imports are set above 3mt.
On the export market, the Indonesian government issued a permit to allow white sugar imports only for food and beverage industry use.
According to the specialist Czarnikow, despite the current economic slowdown, world sugar prices are expected to rise this year. Indeed, the combination of a forecast deficit in India, higher EU imports, and lower global harvest would reportedly lead to further rise in world sugar prices in 2009.
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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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