Commodities Comment-Springing back as macro forces pause:April commodity prices in review
Like a boxer rebounding from the ropes, commodity prices found somemomentum towards the end of April, as the macro forces which have beenbuffeting them for much of the past year paused. Recovering energy pricesand dollar strength reversal certainly played a part, while many Chinese datapoints have started to improve from March levels.
The question now is how sustainable this rally will prove. With the global oilmarket still in surplus we do expect some of the previous headwinds toresume. Meanwhile, with a lack of raw material constraints around, pricesshould continue to trade into cost curves. With further displacement to come,bulk commodity prices look likely to trend lower into mid-year, while basemetal outperformance could well continue.
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Base metals rallied strongly on Thursday helped by dollar weakness, someincoming bids and a raft of short covering, while precious metals sold off inthe UK afternoon following a 28k US initial jobless claims miss. Amongstbase, the big gains were seen for nickel, with LME cash rallying 3.9% to$13,915/t as more longs appear to be joining the recovery, while coppersoared almost without pause throughout the day as apparent momentum fromyesterday’s gains carried the metal higher on wave upon wave of shortcovering, to close up 3.3% to $6,365/t. Elsewhere zinc continued its upwardpath gaining 2% to $2,367/t, while lead chopped around a bit intraday buteventually ended up 1.6% to $2,124/t. Aluminium was up 2.2% to $1,933/t,as the premiums slide allows the paper price to move up within a lower all-inprice. Gold lost 2.4% to move back below $1,200/t following the joblessclaims data, while platinum was off 1.9%.
India’s finance minister has announced that the country will reduce exporttaxes for low grade iron ore from the current 30% to 10%. The cut will applyto ores with grades lower than 58%Fe and as such, will benefit miners in Goawhere output is generally lower grade and where mining is due to restartfollowing years of government enforced closures. At its peak in 2010 Goaexported 54mt of iron ore, although this included blended tonnes fromneighbouring Karnataka and output from mines that have been permanentlyclosed. In 2014, exports were just 2mt. Traders we have spoken to expectexports from Goa could reach 10-15mtpa after the monsoons have passed.
The seaborne thermal coal market is desperately looking for producers to cutsupply. The most likely source of cuts, in our view, is going to be Indonesia,with the country’s small-size producers under the most pressure - combinedthey make up 30-40% of total Indonesian production. In this regard, marketcommentary from Adaro which accompanied its 1Q15 operations releaseprovided some interesting insight. It estimates that total Jan-Feb Indonesiancoal exports fell by almost 5mt YoY. Some of this decline is likely to beattributed to strong rainfall, which Adaro noted was the reason for its own 6%(0.8mt) YoY decline in production, but perhaps it is also an indication thatsome supply cuts are materialising. We will be keeping a close eye on howthings develop.
