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Wednesday, April 22, 2009

Commodities Market Rebounded in March Although Demand Remains Low

Wednesday, 22 April 2009
The IMF commodity price index went up by 2.2% m-o-m in March but was 45% lower than a year ago. Despite the deep global economic recession and further financial deterioration, commodity prices experienced some recovery in March prompted mainly by a surge in energy prices and to a lesser extent in industrial metals and food. Most of the commodity markets, notably industrial metals and natural gas, remain in massive surplus with weakening demand as the crucial factor hindering sustainable recovery in the markets. Demand for some industrial metals has been supported mainly by Chinese buying but there are concerns on the possible outcome when the Chinese inventory policy is over because it is well-known from past episodes that a strong recovery in industrial metal prices will not be feasible until a recovery is seen in
industrial production. It is worth noting that in 2001 global industrial production growth was negative and industrial metal prices began to recover before industrial production reached the bottom which resulted in only mild gains in industrial metal prices for 6 months when industrial production remained negative year-on-year. It seems that at present industrial metal price conditions may be similar to those in 2001. Indeed, there are factors which point to the fragility of the recovery in industrial metal markets such as a decline in the Baltic Dry Freight Index, a drop in Chinese domestic steel prices and the continued growth in inventories of some industrial metals.
The IMF energy commodity index (crude oil, natural gas and coal) gained 4.4% m-o-m in March based entirely on crude oil prices (the average petroleum spot price) which surged 12.4%, while natural gas and coal prices plunged.
Henry Hub (HH) gas has continued declining 11.8% in March. The commodity has been plummeting by more than 10% on monthly basis since the beginning of this year to stand at an average of US$4.54/MMBtu, 57.9% lower than the same period last year on the back of a bearish supply outlook and poor global macroeconomic perspectives. The same factors referred to in our previous report continued exerting downward pressure on the HH gas market, namely, declining US industrial production and rising domestic supply, in particular shale gas and working gas in storage volumes.
Non-energy commodities decreased slightly by 0.8% in March m-o-m owing to losses across the spectrum. However, the pace of decline was lower than the previous month on continuing recovery in industrial metals.
The industrial metal price index moved up by around 3% m-o-m in March as a result of the significant price gains in copper, lead and zinc. These markets were enhanced by some temporal factors such as consumer restocking, higher Chinese imports mainly due to China's State Reserve Bureau (SRB) buying, fund short-covering and a favorable LME-Shanghai arbitrage.
Nevertheless, most of these markets remain in surplus with record-high inventories and weak global demand, which suggests that the increase in industrial metal prices is not sustainable. The premature increase in some metal prices also reflects their dramatic decline in the last months of 2008. The worsening of the situation in the Chinese steel market also suggests that the recovery in industrial metal prices is not sustainable.
Copper prices increased 13.3% m-o-m in March. On the demand side, copper prices were sustained by strong imports from China which increased 99% y-o-y in February on restocking by producers and SRB. Higher imports were also encouraged by favorable London Metal Exchange (LME)/Shanghai arbitrage. Likewise, stocks at the LME declined by over 30,000 tonnes from the previous months. On the supply side, the International Copper Study Group estimates a 13% expansion of refined copper output in 2009 despite the recent production cut announcements.
Lead prices climbed 12.6% in March m-o-m entirely on a record surge in Chinese imports of 308% in last February m-o-m and 100% on a yearly basis driven by a favorable LME/Shanghai arbitrage. Nevertheless, since this astonishing rise in Chinese demand follows a move to replenish stocks rather than a surge in real consumption, the revival in lead prices may be shortlived.
Indeed, lead demand outside China remains weak and the temporal stop of activities in some battery manufacturers due to anemic demand from the automotive industry was reported.
Lead LME inventories stabilized in March.
Zinc prices also rose 9.4% m-o-m in March. As in the previous month, zinc prices found support in China's restocking policy and favorable LME/Shanghai arbitrage. Nevertheless, global demand is still weak.
On the supply side, the production response to low prices led to market tightness, and further output cuts were announced. In addition, Chinese refined production of this metal declined 10% y-o-y in January and February 2009 due to shortage of domestic concentrate.
As a result of higher imports and tight supply, zinc LME inventories recorded a slight decline in March.
Aluminum prices showed a modest gain of 0.4% in March m-o-m on supply factors. Global output of the metal decreased 10% y-o-y in February which was mainly due to a 13% drop y-o-y in the Chinese output. Further output cuts have been announced by European and US producers.
On the demand side, the situation remains bearish with the hefty fall in car sales in US last February – the two main US automakers reported a fall in sales of 51%. Likewise, in other markets the aluminum demand is also weak with South Korean aluminum imports having halved in the first two months of the year. Similarly, the Japan Aluminum Association estimates a drop of 11% in metal shipments for the year starting April 2009 which represents a bearish outlook for the rest of the year.
Low demand translated into another rise in LME inventories of 7% to 3,471,000 tonnes in March from the previous month.
Nickel prices continued falling 6.7% in March m-o-m as a result of continuing depressed stainless steel demand and record-high LME inventories. Chinese finished nickel imports during January-February were 21% lower than in the same period last year. Recent estimates from CRU indicate that a considerable decline in demand for stainless steel was on track to fall by 20% y-oy in China and as much as 54% y-o-y in the US, dragging down demand for refined nickel.
Drastic efforts to adjust supply by producers have not been enough to offset collapsing prices. LME inventories continued to amount to record levels in March, increasing by 100% y-o-y to 108,000 tonnes in March. According to the Nickel Study Group, the surplus in the refined market reached 15.7kt in last January.