Commodities Comment-Iron ore: deficit deepens but unlikely to last

The iron ore market has been in deficit for several months now. For much ofthe time this has not meant that there has been a shortage of ore asstockpiles had been built up and needed to be run down. However, the sharpdraw down in inventory in May in particular means that the market is nowstarting to look tight. It still seems inevitable that stocks will build again in thesecond half of the year as supply increases and real demand most likelycontracts and our base case is that this will be negative for prices.

    However, we draw attention to the second half of 2013 when, from a verysimilar inventory position, mills soaked up all the excess supply in asubstantial restocking that kept prices supported at surprisingly strong levels.

    While macro conditions at the current time are not as supportive as in 2013,we would caution investors to be aware of the risk of an upside surprise iniron ore should the right conditions be met.

    Latest news.

    Metal prices on Tuesday were again pushed around by macro forces, inparticular sharp swings in the euro exchange rate, which ended the day up2.3%. The single currency rallied strongly on what appears to be acombination of some stronger European inflation data, short-covering, and anoptimism that a deal might soon be reached between Greece and itscreditors.

    Chinese port inventories of Indonesian-origin nickel ore are down to 3.65mtas of end-May, latest data from Mysteel shows. At the start of 2015,inventories were 6.15mt and have been drawing at an average rate of 500ktper month. Once stockpiles of high-grade Indonesian ore are depleted andChinese nickel pig iron producers are reliant solely on lower grade Filipinoores, the cost of making nickel pig iron in China will rise.

    Car sales in the big four Eurozone markets, Germany, France, Italy andSpain, were up only 0.4% YoY in May, we calculate from national datareleased on Monday and Tuesday. This is a weak performance compared tothe 10% YoY increase seen in January to April. The explanation lies in a 6.7%YoY fall in Germany and a 4% YoY fall in France, which their respectivenational trade bodies blame on May 2015 having two fewer working days thanMay 2014; corrected for this, sales were up 4% and 7% YoY respectively.

    Looking at the YTD, which removes these effects, sales in these fourcountries are up 8%, a positive for platinum demand in particular.

    LME positioning data released on Tuesday revealed a big decline in netcopper length amongst Money Managers in the week to 29 May. The 10.7klot decrease to 31.1k lots during the four-day trading week was a further lurchin the direction decisively taken the week before, when 8.2k lots of net lengthcame out, but this time driven primarily by 12.8k lots of shorts coming in, whilethe week to 22 May had been shifted by 16.9k lots of long liquidation.

    Interestingly the data also implies a burst of fresh longs (8.8k lots) came in onTuesday 26 May following the bank holiday, evidently hoping a bottom hasbeen reached around $6,200/t, but they were disappointed and by the end ofthe week most (but not all) had exited the positions as the price trailed closerto $6,000/t. Amongst the other metals there were also declines excepting tin.