Monday, May 25, 2009
Saturday, 23 May 2009
As the world economy looks to rebound from the severe crisis, demand for commodities grows, something that have positive effect on prices. At the same time, the growing demand for commodities helps the strength of developing nations economies that are the major producers of commodities and their economy relies on exports. April saw another increase in the IMF commodity price index by 3.7% m-o-m compared to 2.2% in the previous month, but remained 45% lower than a year ago. The rise in commodity prices was driven by the non-energy group which went up sharply by 5%, up from -0.8% in our last release. By contrast, the energy complex showed a strong deceleration in the pace of growth in April. Commodity prices rose despite the complex global economic recession fostered by the favorable impact of better economic indicators for China and the accumulation of inventories as well as the existence of a positive investment sentiment. Additionally, the price gains in commodities for April took place regardless of the situation of the fundamentals as pointed out in previous reports. Most of the commodity markets continue facing massive
surpluses with the lack of demand being the core factor obstructing a sustained recovery of the markets. Although some industrial metals such as copper saw a mild decline in LME inventories, a sustainable recovery will only be possible once the deep economic recession begins to recede and this does not seem to be the case with the OECD economies still facing severe problems.
Copper prices increased 17% m-o-m in April with the LT forward curve having changed into backwardation. As in the previous month the copper market found support on strong Chinese imports which increased 97% in 1Q09 compared to the same period last year mainly due to the restocking policy and to the favorable LME-Shanghai arbitrage. Greater imports led to a decline in stocks at the LME from 500,000 tonnes in March to 429,000 tonnes in April.
Nevertheless, the US Commerce Department highlighted negative data for the copper market as a result of problems of the US automotive and construction sectors. Likewise, the International Copper Study Group suggest that there is a 112,000 tonnes surplus in the January-February period and estimates a 13% expansion of refined copper output in 2009, despite the recent production cut announcements. Copper prices are reflecting an artificial demand which is due to the restocking policy in China but not to a revival of the copper industry.
Aluminum prices jumped by 7% in April m-o-m compared to zero growth in the previous month mainly on output cuts and important Chinese demand due to the government restocking policy with imports of unwrought aluminum jumping by 100% in March m-o-m. On the other hand, global demand remains weak with ALCOA estimating a fall in aluminum sales to the automotive and construction industries of 18% and 10-15% y-o-y respectively in 2009.
Aluminum demand also remains weak in South Korean and Japan. According to ALCOA, further cuts in aluminum capacity will be necessary to balance the market.
Lead prices climbed 5.7% in April m-o-m on Chinese imports which surged 39% m-o-m in March driven by tight domestic supply as a result of greater demand from the automotive industry in China and a favorable LME/Shanghai arbitrage. Regarding the global lead market, the International Zinc and Lead Study Group (IZLSG) highlighted the existence of a deficit in the lead market in February. Considering the adoption of a series of stimuli to the automotive industry in China, lead demand from this economy is expected to remain high in the near future.
Zinc prices went up 13.5% m-o-m in April as a result of a revival in the Chinese automotive industry. Zinc imports from China escalated by 57% in March m-o-m to meet auto sales,
while the favorable LME/Shanghai arbitrage also contributed. In addition, greater zinc imports from China are due to a shortage of metals as several refiners shut down operations in the second half of 2008 following the drop in prices with 50% of Chinese zinc producers having shut down production by March, but are now beginning to return to full capacity. As a result of higher imports and tight supply, zinc LME inventories declined again in April.
Nickel prices surged by nearly 17% m-o-m in April following a decline of 6.7% in March. Nickel prices increased until the third week of April but declined in the rest of the month. The national restocking policy in China led to a sharp surge in nickel prices causing lower LME inventories which declined by 2,000 tonnes to 105,000 tonnes in late April.
Nevertheless, nickel demand remains very weak out of China due to the sharp decline in stainless steel production in the previous months. CRU International estimates that a 24.4% drop in steel output took place in 1Q09 compared to the same time a year earlier, leaving global nickel use over January-February to plummet 27% y-o-y.
Concerning the supply side, it is estimated that 20% of nickel capacity has been cut due to weaker prices, although Chinese output remains 10% higher than the year-ago level.
The World Bank’s agricultural price index rose by 44.9% m-o-m backed by a remarkable surge in soybean and soybean oil prices. The World Bank food price index went up 5.1% mo- m in April.
Gold prices declined 3.7% m-o-m in April following higher confidence in financial
stabilization and economic growth.
The IMF energy commodity index (crude oil, natural gas and coal) grew at a slower pace in April m-o-m (2.8%) compared to 4.4% in March driven by a lower increase in crude oil prices (the average petroleum spot price) of 7.1% compared to 12.4% the previous month, while natural gas and coal prices kept declining.
Henry Hub (HH) gas plunged again by around 12% in April, 66% lower than in the same period last year, essentially due to the lack of demand. Declining US industrial production and rising domestic supply, in particular shale gas and working gas in storage volumes have continued weighing on the natural gas market.
Non-energy commodities showed a strong recovery, increasing by 5% in April m-o-m on the back of considerable gains in industrial metal prices and, to a lesser extent, food prices. The industrial metal price index surged 8% m-o-m in April with further price gains across the entire complex. These markets benefited from bullish investment sentiment and the temporal factors mentioned in our previous reports such as Chinese imports mainly due to China’s State Reserve Bureau (SRB) buying and a favorable LME-Shanghai arbitrage.
Inventories at the LME remain in surplus with record-high stocks 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 will not last.