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Edward Meir/INTL FCStone Mar. 2014 Report - BASE
Mar 5,2014 14:06CST
industry news
The following is an excerpt from monthly market overview for March 2014, written by Edward Meir, Indepent Commodity Consultant with INTL FCStone Inc.

SHANGHAI, Mar. 5 (SMM) - The following is an excerpt from monthly market overview for March 2014, written by Edward Meir, Indepent Commodity Consultant with INTL FCStone Inc.


Copper prices finished February basically flat, as a mid-month advance to the $7250 level fizzled, sending values back down to the lower end of the trading range. Although LME stocks are now at 14-month low, it is what is happening in China that accounts for copper’s inability to gain much upside traction. In this regard, Shanghai copper stocks, in stark contrast to the LME, are at nine-month highs, while physical premiums are softening. Both these situations should come as no surprise in light of the fact that Chinese refined copper imports have been ramping up of late, with January intake at a record high of 536,000 tons, up a whopping 53% over the last year. However, much of this metal is not being consumed, but instead being utilized as a conduit via which importers are managing to get more credit from the banks. In the meantime, the overall copper balance seems to be tightening; Aurubis see 2014 to be in rough balance, while the ICSG thinks that the market was in a 107,000 tons deficit through November of 2013, adjusted for China’s bonded stocks. (The deficit projection reverses a surplus of 23,000 tons expected in October). However, these numbers are rather squishy given that no one knows how much stocks are indeed at hand in Chinese warehouses. We think prices will likely remain on the defensive for much of March and expect to see a $6910-$7180 trading range, with the Ukrainian crisis exerting limited impact at this point. At some point this year, we should see the 2013 low of $6602 retested before the market recovers late into 2014.


After putting in a fresh low of $1671 on Feb. 3rd, aluminum has been among the better performing metals this past month, tacking on $100/MT over the course of February. Many analysts are now saying that the dynamics of the market are changing and a few have even gone so far so as to revise their 2014 balances from surplus to deficit, citing cumulative cutbacks of about 1.5 mln tons that have set in since 2013, ex-China. (Last month, Alcoa added to the total, shutting its Point Henry smelter in Australia). Even the Chinese production trajectory is finally starting to bend. For one thing, government efforts to eliminate selected subsidies and make credit less available (and more expensive) could feed its way into the sector and make marginal production less attractive. Secondly, the Indonesian export ban could start pinching bauxite supply later this year, reducing incremental output somewhat further. Despite these hopeful signs, other forces are pulling the other way. Producers in the Mid-East, for example, are showing no sign of cutting back on output given their competitive cost profile. Secondly, the LME warehouse “trade” continues to insure that metal is being produced, thanks to the still generous contangos. Third, the queue picture at key LME warehouses and the millions of tons of metal stuck in financing deals are both keeping premiums high, leaving producers on the fence about idling even more production. Over the course of March, we see prices trading between $1710-$1840, although we are more upbeat on prices going into year-end as Chinese cutbacks accelerate.


Zinc had a good showing in February, as similar to aluminum, it is a market in the midst of structural change. The complex tacked on roughly $120/MT last month  and pretty much cancelled out a January swoon. Prices are now at $2120, staging a breakout on the charts and now at a one-year high. Several highlights stand out at this particular juncture, the first being a continued decline in both LME and Shanghai holdings. On the LME side, stocks ended February at roughly 761,000 tons, off some 90,000 tons over the course of the month. Shanghai stocks also declined and are off some 20,000 tons year to-date. On the fundamental side, the market seems to be tightening substantially going into 2014, picking up from where we left off in 2013. Specifically, the ILZSG reports that zinc was in deficit by 60,000 for the year, its first short-fall since 2006. Much of the recent swing in the supply/demand balance is attributable to supply, where a number of mines are reaching (or have reached) the end of their useful lives. In fact, a recent ILZSG report said that mine supply grew by a scant 1% last year (ex-China), down from a hardly more impressive +3% in 2012. While zinc supply remains fairly quantifiable, it is the demand side of the picture, particularly from China, that is the big unknown heading into 2014. With much zinc being siphoned off into the construction industry, any substantial slowing in the real estate market could have an adverse impact on offtake. In March, we see zinc trading between $2020-$2185, while being friendlier to the complex heading into year-end.


Lead finished higher over the course of February, but the advance was more muted than what we saw in some of the other metals. This was somewhat surprising given that the US is experiencing among one of its coldest winters in some 20 years, which would lead one to assume that there would have been a higher-than-usual uptake for car batteries. (Perhaps investors were instead focusing on the fact that US car sales have decelerated over the past two months). Less controversial, are numbers we got over the course of February that may explain lead’s relatively more subdued performance. For one thing, although LME stocks continued their decline in February, the aggregate drop was much less than any of the preceding three months. Moreover, the ILZSG reported that the complex was in deficit by 20,000 tons over the course of 2013, a 21,000 ton improvement over the 41,000 ton cumulative shortfall reported through November 2013. Over the course of March, we see lead trading between $2070–$2190, but remain upbeat towards the complex longer term, in light of a prevailing structural deficit, coupled with the fact that lead is becoming increasingly more expensive to produce given zinc mine closures and the mounting environmental costs associated with its production.  


It is difficult enough to make sense of metal markets as they are, let alone try to analyze them through artificial variables, such as the Indonesian export ban foisted on the market in mid-January. While the end-game remains uncertain at this point, what is less debatable is the heightened volatility that this move has generated. For now, it is becoming clear that the Indonesians are determined to see the ban through to its logical end. However, we suspect that the government could make another attempt to modify the restrictions, perhaps in the April/May time frame when the country’s legislative elections are over, which also may be why prices have not exploded to the upside just yet. Another reason for the relatively orderly advance lies with the fact that the Chinese have stockpiled a considerable amount of nickel ore, with January imports jumping to 6.12 mln tons from just under 4 mln tons a year earlier. Many analysts are now projecting higher prices going forward, with numbers like $20,000 being bandied about. We would urge some caution here, as basing forecasts on capricious government decrees is a dangerous game. For evidence of this, look no further to how quickly the Indonesians caved recently on major mining companies having to pay ad-ditional export taxes. Having said that, we still expect to see higher prices over the short term, as we do not see any kind of ban modification just yet. Specifically, we are calling for a trading range of $14,500-$15,600 during March.   


Tin pushed higher in February, as decrees out of Indonesia confused investors and helped the firmer tone. In the latest developments, the ICDX said that it will now assign a committee the job of “setting” prices for tin below which sales could not be made. It is not certain how strongly the exchange is going to enforce this measure or manage its repercussions, but the logic behind the move is designed to protect tin from “severe fluctuations” and to prevent the metal from falling below cost. Needless to say, variations of this model were tried in various markets over the years (including by the doomed tin buffer stock manager) with mostly negative results. As we wait for the consequences of this latest tweak to unfold, we suspect that Indonesian production will fall, as miners will find it difficult to sell tin at market prices, leading to economic dislocations and an inevitable increase in smuggling. Moreover, higher prices, if sustained, could drive consumers from tin altogether, as nickel producers found out when $50,000 metal drove their buyers to cheaper NPI. In other news, refined tin shipments out of Indonesia dropped to 4,613 tons in January, off some 66% from December’s two-year high. PT Timah expects exports in 2014 to be off some 35%, although it hopes that higher prices will help offset some of the revenue losses). Given that LME stocks now stand at 8,000 tons, a five-year low, we suspect that prices will indeed forge ahead over the course of March and see a $22,800-$24,200 trading range in place. However, we expect values to eventually trend lower once the Indonesian restrictions prove unworkable. The market also cannot count on strong Chinese imports either, which finished 2013 at a four-year low.


INTL FCStone, Inc. and its affiliates assume no liability for the use of this information contained and expresses no solicitation to buy or sell futures, options on futures contracts, or OTC products. Commodity trading involves risks and past financial results are not necessarily indicative of future performance. Any hypothetical examples given are exactly that and no representation is being made that any person will or is likely to achieve profits or losses based on those examples. Reference to and discussion of OTC products are made solely on behalf of INTL Hanley, LLC. Reproduction without authorization is forbidden. All rights reserved.

Edward Meir

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