All Eyes On Jackson Hole: Key Events In The Coming Week

Looking at the week ahead, in Europe the focus will likely be on the flash August PMI readings. The readings for the Euro area, Germany and France are due on Thursday.  Markets are expecting a modest 0.4pt decline for the Euro area composite PMI but we suspect plenty of focus will be on the flash manufacturing PMI reading for Germany given the softening data momentum over there. The other notable European releases this week also include the Euroarea trade balance today, UK inflation tomorrow, and German PPI on Wednesday. In the US, we will get the NAHB housing market index today, July CPI and housing permits/starts on Tuesday and the Philly Fed survey on Thursday. We will also get the latest FOMC and BoE's meeting minutes on Wednesday. In Asia, the focus will be on China's HSBC flash manufacturing PMI for August on Thursday. Still, all eyes (and minds) will be on Jackson Hole this week.

However, the main event of the week will be Yellen's long awaited speech at the Jackson Hole 3-day symposium taking place August 21-23. The theme of this year's symposium is entitled "Re-Evaluating Labour Market Dynamics" and Yellen is expected to deliver her keynote address on Friday morning US time. Consensus is that she will likely highlight that the alternative measures of labour market slack in evaluating the ongoing significant under-utilisation of labour resources (eg, duration of employment, quit rate in JOLTS data) have yet to normalise relative to 2002-2007 levels. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is probably not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September.

Interestingly Mario Draghi will also be attending this time and is expected to deliver a luncheon speech at 12.30pm local time on the same day. Other participants at the symposium also include BoJ’s Governor Mr. Kuroda, Central Bank of Brazil’s Governor Mr. Tombini and BoE’s Deputy Governor Mr. Broadbent.

Summary of the key events:

Natural Gas as a Trucking Fuel Fails to Deliver

Much has been made of the potential for natural gas as a fuel for the trucking and rail industries.

The dramatic fall in natural gas prices in recent years has spurred investment in refueling stations for the road trucking industry and forced the rail industry to review their position regarding the economics of using natural gas either as compressed natural gas (CNG) or as liquefied natural gas (LNG) to replace diesel fuel.

So far, though, in spite of US natural gas prices that are a third of global levels, substitution has been limited. Presently, natural gas used as transportation fuel constitutes only about 0.1 % of total US consumption. According to a report, about 18 months ago half of that amount was consumed in California alone. A majority of states use less than 2 million cubic feet per month, and 11 states don’t use any according to this report. California remains, by far, the largest adopter according to EIA data as this recent graph shows and the agency reports for 2013 road transporttaion still only made up 0.126% of natural gas consumption. So, while there has been a lot of development work among engine builders and government agency support for specific programs, wider uptake remains slow.

The argument on purely economic grounds looks compelling at first sight, but on closer examination upfront capital costs and worries about longer-term price competitiveness are overlaying a still limited refueling infrastructure to deter widespread investment.

As an example, using federal government estimates the report assumes that a typical American family puts 12,000 miles on a car. At 25 miles per gallon, they will consume 480 gallons/year, resulting in a cost of about $1,920 at $4 a gallon. Natural gas at an equivalent price of about $2.50/gallon would save the family $720 a year. However, if that savings comes at the cost of a $10,000 vehicle purchase price premium it is no more compelling than that for electric cars with similarly high upfront costs – government subsidies excepted.

The article goes on to apply the same general consideration to high upfront costs of heavy LNG trucks, currently amounting to about $90,000 more than traditional diesel-powered versions. As with CNG cars, this is in part because they aren’t yet being mass-produced. On the other hand, the article goes on, those trucks log a lot more miles than cars, and the accumulated fuel savings should provide enormous business benefits over the long haul.

The energy density of CNG and even LNG is less than for diesel, by 6:1 for CNG and 1.7:1 for LNG making fuel bulk and weight an issue. Natural gas however does burn more cleanly, extending vehicle life, reducing maintenance costs and reducing emissions. Specifically, natural gas is said to cut carbon monoxide emissions by an estimated 90%-97%, nitrogen dioxide emissions by 35%-60%, and carbon dioxide emissions by an estimated 25%-30%. The reduction in emissions, is what is driving federal incentives to adopt the fuel, and explains why California is so far ahead of everywhere else in terms of uptake.

The vagaries of government support aside the greatest threat to LNG or CNG adoption as a trucking fuel, though, could be a dilution of the current cost argument. Natural gas prices may be low now but will they remain low? Australia’s example says they will not, a Motley Fool article points to Australia’s natural gas bonanza spurring the development of export facilities and the rise of domestic prices to compete with supplies being sent to the lucrative Asian market. Pressure from oil and gas firms in the shale gas market to export could equally level US prices to a point closer to world prices. The oil-to-gas ratio has already fallen in the US from 7:1 in 2012, and is expected to reach to 3.4:1 by 2018.

In the long term, the price advantage enjoyed by US consumers for both oil and gas will almost certainly reduce as imports fall and exports rise. Taken together, the potential rise in natural gas prices coupled with the capital costs of converting from diesel to natural gas may not favor a long-term conversion of fuels in the trucking industry and may explain why the rail industry is moving very cautiously in converting existing locomotives or ordering new one’s outside of specific rail road/client programs.

Palladium skyrockets on Russia tensions, hits 13-year high

Palladium hit $900 a troy ounce on Monday for the first time since 2001, taking this year’s price gain to 25%.

The precious metal has benefited from real and potential supply disruptions in South Africa and Russia

The precious metal has benefited from real and potential supply disruptions in South Africa and Russia, the two main producing countries.

Together they account for close to 80% of global supply of palladium and 70% of platinum output, which are mainly used to clean emissions in automobiles.

But while one worry is already over (the end to the devastating strike in South Africa last July meant that roughly 10,000 ounces of platinum and 5,000 ounces of palladium have begun to find its way onto the market), fears regarding sanctions against Russia over its intervention in Ukraine have kept prices on the boil.

After dipping to $836 an ounce on August 6, as investors took profits, the metal price has soared steadily on fresh speculative interest.

Palladium futures for September delivery jumped 0.3% to $897.10 an ounce at 10:17 a.m. on the New York Mercantile Exchange. Earlier, the price reached $902.75, the highest for a most-active contract since Feb. 22, 2001. The metal climbed for the ninth straight session, the longest rally since July 8.

Precious metals analyst at Mitsubishi, Jonathan Butler, said in a note Monday the palladium price had reached its most expensive relative to its sister metal platinum in 12 years.

Platinum, also used in auto catalysts, traded at $1,440 an ounce on Monday and is nowhere near record levels. The precious metal hit $2,253 in March of 2008 and has never been above $2,000 since then.

Chinese refined copper surplus to widen in 2014 on lower demand

 According to Chinese industry experts, the refined copper surplus in the country is expected to further widen in 2014 on the back of low demand from collateralized borrowing sector and construction industry.

According to experts, August is traditionally considered as a month of weak consumption demand. The advent of buying season in October is not expected to give significant boost to refined copper consumption in the country, which ultimately would lead to higher surplus during 2014. The experts note that though the infrastructure sector is projected to witness stable growth, the demand from private sector construction sector is feared to slow down.

In the half-yearly copper commodities report published by the state-owned Antaike, the copper surplus forecast was raised to 1.18 million mt, up from the earlier forecast of 730,000 mt.

Meanwhile, the country’s refined copper production is expected to increase by 7% in 2014 year-on-year to 6.83 million mt. The consumption of copper too is forecast to increase by 6.7% from the previous year to touch 8.75 million mt in 2014.

Copper Trades Near One-Week High on U.S. Homebuilder Sentiment

Copper in London traded near the highest price in almost a week after data showed confidence among U.S. homebuilders rose to the highest in seven months. Nickel rose.

The metal for delivery in three months on the London Metal Exchange was little changed at $6,899.75 a metric ton at 9:58 a.m. in Tokyo. It advanced 0.5 percent to close at $6,905 yesterday, the highest since Aug. 12.

The National Association of Home Builders/Wells Fargo sentiment measure climbed to 55 in August from 53 in July, the Washington-based group reported yesterday. The U.S., the second-biggest user of copper, reports inflation data today.

Speculators boost bullish bets in gold, cut silver and copper longs - CFTC

Hedge funds and money managers boosted their bullish bets on gold futures and options for the first time in three weeks, as the metal's prices climbed on rising geopolitical tensions, the Commodity Futures Trading Commission said on Friday.

The group, also known as Managed Money, slashed net-long positions in silver and copper markets in CFTC's latest Commitments of Traders report.

Iraq's worsening security conditions due to an Islamist insurgency and increasing violence in Gaza triggered safe-haven demand, sending bullion prices nearly 2 percent higher in the week to Aug. 12, the period covered by the CFTC data.

Speculators increased their net long position in gold by 29,598 contracts to 133,708 lots, the CFTC data showed.

The group lowered net long positions in silver by 5,560 lots to 23,506 contracts.

Speculators also cut 15,233 bullish bets in copper to lower the market's net longs to 19,096 lots, their fourth consecutive decrease.

In addition, the group increased bets on platinum by 1,243 contracts to a net long of 39,080, and added palladium longs by 1,351 to 18,158.

Interactive graphic: http://r.reuters.com/buv87r

Novelis the driving force behind Ford's aluminum trend

Novelis, a global aluminum supplier, is seeing a 45-year-old dream come true as the auto industry is on the cusp of making the lightweight material mainstream.

Novelis is supplying aluminum for the 2015 Ford F-150 that goes on sale later this year. The supplier is expanding its Oswego, N.Y. plant, for a third time and Ford can use everything it can make.

For 40 years prior to 2009, the amount of aluminum on vehicles increased by about seven pounds a year, said Tom Boney, a general manager for Novelis North America. 

First it was hoods, then doors and liftgates. A few luxury automakers were bold enough to offer aluminum frames and body panels on selected models. But when it came to the full body, steel remained the metal of choice.

“We just kept plugging away,” Boney said. “We were always the bridesmaid, never the bride.”

There were times when the executives thought a breakthrough was nigh. For example, Novelis worked with Ford on an aluminum Taurus in the 1990s.

“We thought it would be it,” Boney said. But it was not to be.

So when Ford and Novelis started talking in 2009 — facilitated by Novelis CEO Phil Martens, a former Ford executive, and Ford’s former CEO Alan Mulally’s knowledge of aluminum from his time at Boeing — the aluminum F-150 evolved from dream to reality.

Ford makes about 700,000 F-150s a year and starting with the next-generation light-duty truck they will all have aluminum bodies. With reports that General Motors’ next generation of pickups, Chrysler’s next Jeep Wrangler and maybe Ram pickup could all shift to aluminum, Novelis is positioned well for the industry’s next big trend.

Like most overnight successes, it was years in the making.

“It has been a 40-year journey for the aluminum industry,” Boney said.

By 2025, 18% of all vehicles will have all-aluminum bodies compared with less than 1% now, according to a recent report from Ducker Worldwide, which examines material trends.

Pickups are leading the charge, partly because they must achieve big improvements in fuel economy in the next decade. Ducker estimates by 2025, 70% of pickups will be aluminum intensive.

Drilling down into Ducker’s data, 46% of doors will be made of aluminum by the middle of next decade, up from 3-5% now; and 85% of hoods, more than double today’s 35%.

“It’s a pretty exciting time and with the alloys we have, we don’t think we’ve arrived yet” at the best alloys for future weight reductions, Boney said.

Novelis has taken a giant step with the development of a military grade alloy that can be produced in high volumes.

The unique alloy was developed specifically for the auto industry, said Todd Summe, Novelis director of automotive technology.

Novelis is already working on its next set of aluminum vehicles for 2019. Neither Boney nor Summe would confirm they are the GM trucks.

Summe said future vehicles will have an even greater mix of materials, including layers of different alloys, gauges and thicknesses in a single component.

To meet the growing demand, Novelis has quadrupled its potential production and hired almost 1,000 people at its Oswego plant. There are two lines now and construction began in June on a third line to be ready next year. It will bring North American capacity to 400,000 metric tons a year and represents an investment of about $500 million in recent years.

“All that capacity was installed on known purchase orders,” Boney said, “so we are all sold out.”

But if more customers commit to broader aluminum use, “we are able to step up to the challenge.”

Recycling is also key. Novelis will sell coils of aluminum to Ford. As much as 50% becomes waste in the stamping process. Ford will save the scrap, separate it by alloy and give it back to Novelis to use in producing new coils.

Novelis has a target of using 80% recycled aluminum by 2020 through relationships like the one with Ford, up from 43% last year, said Summe.

The Novelis executives are not worried that truck buyers will shy away from the F-150 and deflate the momentum aluminum is picking up.

“Ford has done its homework and the industry has done its work.” Boney said.

Summe agrees.

“Our confidence level is very high,” he said.