Indonesia Ends the Six Month Metal Ore Export Ban

Indonesia has ended the six month ore export ban and has restarted the exports by taking new policy to improve the returns on the shipped out resources from the largest economy of Southeast Asia, said a mining ministry official.

Indonesia has imposed a ban on unprocessed metal ore exports in January and as a part of the policy to force the miners to construct domestic smelters for processing the minerals, they have levied an escalating tax on the mineral concentrate exports.

Disputes followed by the export ban stopped the monthly export of about $500 million minerals and concentrates. Before the imposition of the ban, Indonesia was the major exporter of nickel ore, iron ore and aluminium ore.

Coal and Minerals Director General, Sukhyar told that last week ships with iron ore, zinc, and lead concentrate left the nations amid the disputes, after two companies agreed to pay a 20 percent export tax. The two firms are Sebuku Iron Lateritic Ores (SILO) and Lumbung Mineral Sentosa.

SILO has shipped about 100,000 tonnes of iron ore concentrate where as Lumbung has shipped about 8,000 tonnes of lead and zinc concentrate. Sukhyar added by referring to the escalating tax that finally the companies wanted to pay it. The export tax has even made a legal dispute with the U.S miner Newmont Mining Corp.

SILO anticipated to ship about 8 million tonnes of iron ore concentrates per year where as Lumbung would export about 29,000 tonnes annually. The two companies are exporting the ores to China.

What are the factors to drive base metals this week?

A series of economic data will be due this week, and with strong speculative activities, base metals prices will each continue down recent trendlines, as per major Chinese analysts.

Analysis of Major Macro News in China
The National Bureau of Statistics (NBS) shows that China’s GDP grew at an annualized 7.4% in 1H, as Q2 growth accelerated to 7.5% (annualized), said Shanghai Metals Market.

China has undertaken small stimulus measures – including infrastructure investments and adjustments to bank lending ratios – leading to June’s rise in fixed-asset investment.

Investment contributed less than 3.6 percentage points to H1 growth, below the 4.1 percentage points from consumption. But, current growth remains heavily dependent on government-driven consumption, which has served to counter slides in manufacturing and real estate, but at the price of a spike in lending. New lending in June outpaced the previous three months.

China will maintain a pro-growth posture into 2H. A series of measures are expected to expand the money supply – including tax cuts and increased capital lending – to counter a steep drop in forex receipts. 

The PBOC is also likely to cut deposit reserve ratios for all financial institutions after a recent targeted cut. Nevertheless, China’s economy continues to face pressure from the lack of domestic demand and a sluggish real estate sector.

Aluminum contango sinks to lowest in 18 months on dwindling stocks

Aluminum's contango has fallen to 18-month lows amid dwindling exchange stocks, the latest in a recent series of bouts of volatility that have reignited a years-long debate about how tight the market really is.

The cash price on the London Metal Exchange was at a discount of $16.75 per tonne to three-month forward prices on Monday, more than half the size of the spread than a month ago and its smallest since December 2012.

The sudden narrowing was the third time spreads have tightened since April when spread volatility suddenly returned after a nine-month absence.

The aluminum market has been in a marked contango for at least the past five years, giving traders the opportunity to store vast stocks of the metal while it accrues value and sell it forward at a profit in so-called financing deals.

There is little sign that a prolonged backwardation, with cash prices trading at a premium over forward prices, will materialize any time soon, particularly while the LME stocks remain near record highs and inventory is locked in financing deals outside of the market.

Even so, the reasons behind the narrowing contango have polarized the market while LME stockpiles remain near all-time highs.

LME stocks have slumped 10 percent this year to 4.94 million tonnes on Monday, their lowest in almost two years, but that is still close to record highs and historically very high.

Some physical traders say it is the latest sign yet that smelter cuts due to weak LME prices have started to pinch supplies of fresh nearby production while endusers have been buying on a hand-to-mouth basis.

But others say those vast stockpiles continue to distort the real supply-and-demand picture.

"Aluminum is massively skewed by the slug of inventory hedged on or using the LME. It's not as tight as the spreads look," said Standard Bank analyst Leon Westgate.

Traders taking delivery of the metal leaving the warehouses are putting a big portion of it into new financing deals in facilities outside of the LME network where storage costs less, traders said.

"We've got very unusual circumstances: higher cash prices, tighter spreads and higher premiums," said a U.S. trader.

RETURN OF VOLATILITY

The sudden volatility is also significant after nine months of a steady forward curve. The cash-to-three-month contango remained pretty steady in a $40 to $50 range between July last year and April this year.

Analysts and traders expect the fluctuations to stay for now.

While the reason for their sudden return was not immediately clear, it followed one of the most critical periods for the LME in its 137-year history and for commodities trading.

In July last year, the exchange announced the most extensive overhaul of its warehousing network aimed at placating consumers who blamed the LME's policy for logjams that had inflated physical aluminum prices.

In the United States, physical premiums paid on top of the LME benchmark for delivery have soared to all-time highs.

The rule changes that would have increased the rate at which warehouses would deliver metal out were due to come into effect on April 1, but measures have been delayed due to a legal challenge from Rusal.

Renewed swings in spreads also come after a steady retreat by Wall Street banks, including Morgan Stanley and JPMorgan Chase & Co, from commodities trading due to regulatory scrutiny and weaker profit margins.

"Quite why was it benign for such a long period of time isn't clear, though what is obvious now is that there's been a marked change in behavior," said Westgate.

The New Scariest Chart In America

For the last few years, the 'scariest' chart for Europeans has been the unending surge in youth unemployment. However, amid all the sound and fury of mainstream US media discussions of the 'recovery' in America and the President's employment track record, Constantin Gurdgiev notes another 'scariest chart of the US recovery' that remains in full 'crisis mode'...

The Duration of Unemployment In The US...

True Economics blog

Chinese commodity financing scam dents copper’s prospects

Copper prices on the London Metal Exchange have dropped over five per cent since the beginning of the year to $6,987 (₹4.22 lakh) a tonne. A major reason for this fall is the drop in demand after a scandal over financing of commodities broke out in China. Data on Chinese copper imports show sharp drop in consumption.

The scam came to light a couple of months ago and it has seen copper shipments to China drop drastically. In May, copper imports declined 16 per cent to 3,80,000 tonnes from April and last month they slipped further to 3,50,000 tonnes.

Copper prices could come under more pressure after Citigroup Inc Chief Financial Officer John Gerspach said, during the weekend, that the bank has extended $280 million (₹1,692.31 crore) as loan to non-Chinese subsidiaries of large multi-nationals at two Chinese ports, Qingdao and Penglai.

The problems have cropped up in the metals market after Chinese authorities said they were probing a commodity trading house, Decheng Mining, charged with securing loans worth $435 million (₹26,291 crore) after pledging three times over the same metal stocks in Qingdao port. The trading house has also done the same thing with aluminium.

Chinese officials suspect that some 3,000 tonnes of copper and one lakh tonnes of aluminium could have been offered as collateral several times to obtain loans.

Bloomberg reported that local authorities in China were checking metal inventories that included 1.94 lakh tonnes of alumina and 62,000 tonnes of aluminium besides copper.

At least 18 banks have lent a total of 14.8 billion yuan (₹14,400 crore) to Decheng Mining owner Chen Jihong, a Singapore national. Other banks aren’t revealing their exposure to commodity financing in China and there are fears that there could be more than one claimant for the pledged stocks.

South Africa-based Standard Bank Group Ltd has, on its part, begun investigations into potential irregularities with metals in bonded warehouses at Qingdao port.

The scandal has broken when the metals market looked to gain after copper slumped to a four-year low in March in view of China’s slowing economy. Banks and trade fear that the scandal could be deeper than initially feared.

China’s move to tighten extending credit to corporate firms is seen the reason for such a scandal. This led to commodity financing, wherein companies pledged their stocks of raw material and finished products as collateral to get loans, and rise of private lenders. In case of any default, the lenders could sell these stocks and recover their loans.

Minsheng Bank, one of the lenders, has said that its collateral ratio for the loans is 55 per cent. This means that if a borrower has offered collateral for, say, ₹1,000, the bank has given ₹550 as loan.

The scandal has resulted in liquidity problems since banks have tightened their credit norms. This can lead to problems in the market and even lead to selling pressure – a reason for copper’s struggle. Some companies which had held these inventories only for obtaining credit have begun to offload them in the market.

International lenders have cut their exposure in China and they are increasing their scrutiny on their clients from the communist nation.

The scandal has also reduced the arbitrage opportunities between the Shanghai Futures Exchange and the London Metal Exchange with the premium that Shanghai enjoyed dropping rapidly. Players in the metal market took advantage of the Shanghai premium by selling copper on the Chinese bourse and buying it on the London exchange.

But a section of trade now sees reverse arbitrage, where investors can sell on the London exchange and buy from Shanghai.

For India, this scandal will ensure lower copper prices. Firms producing copper here fix the price based on the previous fortnight on the London Metal Exchange. With prices under pressure, it is likely that the metal used for electrical and construction purposes may not see much of a rise for now.

China's MMG to Cut 2014 Zinc Output due to Increasing Prices

MMG Limited of China decided to curb its 2014 zinc output due to the increasing prices of metal because of the limited supply.

The company’s century mine of Australia is planning to run dry next year, which removes about half-million tonnes of zinc from the 13 million tonne global market. This results an increasing price for the metal.  The mine is the world’s largest zinc source.

This made the mining giants Nyrstar and Glencore to find out new zinc source so as to meet up with the Chinese zinc demand for rust proofing the new cars and to coat steel. In this week, LME-three month zinc traded at its highest price, which is the highest in almost three years. Since March end, the prices have increased 20 pct.

The company cut production output targets of zinc concentrate from 600,000 to 625,000 to between 575,000 tonnes and 600,000 tonnes due to the slow performance at Century mine in the second quarter this year. The Q2 output of the zinc decreased by 13 pct year on year to about 110.891 tonnes. Refiners of Nyrstar are the major buyers of Zinc mines at MMG.

MD of MMG, Mr. Andrew Michelmore said that what they were seeing at present was a recognition that not only Century but also number of other mines were closing down and supply of the zinc concentrate was going to be tighter and tighter. Duglad River deposit in Australia, which is now subjected to an assessment of future enhancement, will partially replace the lost production output from Century.

Big Brunswick and Perseverance mines closure in Canada caused zinc lost of about 335,000 tonnes last year. Due to depletion, old mines in Africa and Europe also get closed. Zinc is mainly used as an anti-corrosive in the galvanizing process.

The global zinc metal market declined to 194,000 tonne deficit the first five months to May 31, according to the International Lead and Zinc Study Group. This is above 10 times the deficit reported in the first 11 months of the year 2013.

Aluminum in Bull Market as Investors Lured by Shortage Outlook

Aluminum entered a bull market in London and traded near the highest in 16 months on speculation demand will exceed supply for the metal used in everything from cars to packaging.

Stockpiles monitored by the London Metal Exchange slumped 9.4 percent this year to the lowest in 22 months. Producers outside China cut output after prices on the bourse slumped 13 percent last year. Demand will exceed supply by 136,000 metric tons this year, with the deficit widening to 504,000 tons next year, Bank of America Corp. estimates. Premiums added to the LME benchmark price to obtain metal in Europe, North America and Asia climbed to records this year.

“Aluminum is another metal with improving fundamentals, so we’re not surprised to see the price rally there,” said Nic Brown, head of commodity research at Natixis SA in London. “As the global market gradually shifts into deficit, so the LME aluminum price should benefit.”

Aluminum for delivery in three months on the LME was little changed at $2,021.75 a ton at 9:20 a.m. in Tokyo. The metal advanced 2 percent to $2,020 a ton yesterday, 20 percent above the closing low of $1,677 on Feb. 3, fulfilling the common definition of a bull market. The price touched $2,024.25 yesterday, the highest since Feb. 28, 2013, and is 12 percent higher this year.

Output cuts outside China, the biggest producer, reached almost 2.8 million tons a year since November 2011, while curbs in the Asian nation amounted to 3.2 million tons since January 2013, according to HSBC. Producers are unlikely to restart in the coming quarter even if prices recover,Michael Widmer, an analyst at BofA Merrill Lynch in London, said a report July 10. Traders hold inventories “tightly,” he said.

LME Stockpiles

Stockpiles tracked by the LME fell for a 14th straight session to 4.95 million tons, the lowest since Sept. 12, 2012. Not all is immediately available as some metal is tied to financing deals. It takes 774 days to withdraw aluminum from LME-approved Pacorini Metals warehouses in the Dutch city of Vlissingen, according to the LME. Wait times at the biggest repository of LME aluminum lengthened by 58 days from the end of May.

Premiums added to LME prices for immediate delivery, which indicate regional supply and demand balance, are at a record $455 a ton in Europe, while the U.S. surcharge climbed 68 percent this year to 19.75 cents a pound, according to Metal Bulletin data. Aluminum for immediate delivery traded at a $13.75 a ton discount to the three-month contract last week, the narrowest contango since Dec. 18, 2012. A narrowing contango signals shrinking supplies of nearby metal.

Market Positioning

The rally in industrial metals including aluminum has been driven by “paper market positioning” on the back of improving macro sentiment, money inflows and anticipation of more positive supply and demand conditions next year, David Wilson, an analyst at Citigroup Inc. in London, said in a report July 16.

Analysts from Citigroup to Macquarie Group Ltd. still question whether the rally can be sustained as China ramps up production. LME stockpiles are equivalent to almost the whole of North American consumption last year, according to HSBC data.

“You cannot ignore the gigantic stocks overhanging this metal,” said Vivienne Lloyd, an analyst at Macquarie in London. “It’s true to say a lot of these metals are not as easily accessible as perhaps they should be, but the story doesn’t really hold water. The metal is fundamentally oversupplied.”

bloomberg