Global aluminium market to shift to deficit in 2014: HSBC

The Metals Quarterly Report for Q2 2014 released by HSBC forecasts the global aluminium market to turn into deficit from surplus during 2014. However, the firm believes that the market may remain balanced in 2015.

HSBC states that it has lowered its non-Chinese production forecasts for 2014 and 2015 to 640,000 mt and 940,000 mt respectively.

According to HSBC, the recent weak prices of aluminium have forced major facility shutdowns, which in turn may shift the market from surplus to deficit during this year. The global aluminium market may witness a global deficit of 144,000 mt in 2014. But the market may move back to 288,000 mt surplus by 2015.

The global surplus is likely to widen during 2016 and 2017,it added. This is mainly on the back of expectations that delayed projects in India and Russia may become online during 2016-’17. The bank anticipates new production to the tune of 4 million mt coming out of new smelters in these countries as well as in Russia, Canada and the Middle East.

The bank has also lowered its demand growth estimates for the five-year period from 2013-2017 down to 5.5% from 5.7%. The average aluminium price for 2014 may remain at $1,887 per mt. The prices may move above $2,000 per mt by the end of the year 2014.

Bengal hikes stamp duty on commodity contracts

The West Bengal Government has increased stamp duty on contract notes, a move that is likely to result in a fall in trading volumes at commodities exchanges.

According to recent notification , the State Government has imposed a stamp duty of 50 paise for every ₹5,000 in commodities traded.

Earlier, the stamp duty was 50 paise per contract, irrespective of the value of the contract.

The increase in stamp duty is likely to impact several commodity traders who are a part of these exchanges.

Low margin biz

Commodity traders generally operate on typically low margins, and depend mostly on high volumes to make money on trades.

A senior official at a commodity exchange, who did not wish to be identified, pointed out that an increase in stamp duty will logically lead to a decline in trade volumes as business will become unviable.

However, the trend is likely to be felt only over the coming months.

“Either these people will stop trading or they might move to some other state where the stamp duty is lower,” the official pointed out.

NSEL crisis

The increase in stamp duty is the latest in a series of incidents, including the introduction of the commodities transaction tax in 2013 and the payments crisis at the National Spot Exchange Ltd, that have resulted in a fall in trading volume at commodities exchanges .

Chinese Stimulus: Copper may benefit more than most metals

Morgan Stanley analysts said that they are surprised by copper’s under performance against the base metals complex so far this year, but suggest the red metal could benefit more than most metals if authorities in key consumer China move to stimulate the economy.

“Physical availability in the country is tightening, as inventories fall and SHFE (Shanghai Futures Exchange) structure enters its steepest backwardation since 2Q11,” said Morgan Stanley via Kitco News.

This trend is the result of power grid investment, which accounts for 47% of China’s copper demand, being up 13% year-on-year for the 2014 so far, pointing to the government’s goal of lifting investment 20% above the record spending in 2013.

“Scrap availability also remains tight, with March marking the 14th consecutive (year-on-year) decline in scrap imports. As copper’s under performance results from investor concerns over China, it could be the prime beneficiary if policymakers respond to worsening macro data, as we expect,” Morgan Stanley concluded.

China Holds the Keys to the Gold Market

Last year China's private-sector demand for gold reached a record level of 1,132 tonnes, and according to the World Gold Council (WGC), the Asian nation could easily dominate the gold market once again, as they predict demand growing 20 percent by 2017.

This updated projection from the WGC confirms what I've written about previously: China's love for the precious metal remains robust. We are witnessing this country transform into an economic powerhouse, and now, the world's largest gold market! I think it's important for investors to recognize the main drivers behind this tremendous growth.

1. A new middle class has more money to spend.

Despite all the grandiose numbers we see in China's gold market, the Asian nation hasn't always been the "golden goose" of the game. The WGC points out in its recent report, China's Gold Market: Progress and Prospects, that only in the last several years has China seen an emerging middle class supported by higher incomes. For example, Shenzhen is currently a city with over 10 million people, accounting for 70 percent of China's jewelry fabrication. Just 30 years ago however, it was only a small town of around 330,000 people, meaning consumer demand for gold at that time was minimal at best.

Over the last 10 years however, a new middle class has emerged and consumers have been enjoying their new wealth. As GDP began to rise, people started buying more gold jewelry and coins. In addition to increased spending on these items, the investment demand for the yellow metal progressed as the population sought a hedge against inflation.

2. Jewelry is still the top demand driver.

The WGC report also reaffirms the ongoing power of the Love Trade. The Love Trade, one of the two main drivers of gold along with the Fear Trade, relates to the cultural affinity for the precious metal particularly in Asia, India and the Middle East. Consumers continue to purchase gold jewelry and coins year-after-year, and demand rises in synch with gift giving for religious holidays and celebrations.

As you can see in the chart below, since 2004 the volume of gold jewelry consumed in China has tripled.

What's more, China surpassed India as the world's largest consumer and manufacturer of jewelry in 2013. According to a recent Reuters' article, gold jewelry sales in India slowed by 10 percent since import restrictions were imposed on the country last year - a likely factor placing China in the top spot.

3. Industrial demand is increasingly important.

Though not nearly as strong as the gold jewelry demand in China, the country's rise in GDP has also increased industrial demand for gold. The WGC says that electronics are the dominant source of this industrial demand. Gold is used in cellphones, computers, circuit boards and recently the automobile industry has seen an increased demand for the metal.

Gold may seem like an expensive option to choose from to build cellphone parts or airbag connectors in vehicles, but as the report states, "Although manufacturers are always trying to reduce the cost of components and substitute gold with lower cost alternatives, this cannot be done where optimum performance and, especially, safety concerns are to the fore."

In our slideshow, The Many Uses of Gold, we explain other ways gold is used; not only for industrial needs, but for medical and technological advances as well.

4. China is diversifying away from the U.S. dollar.

When it comes to foreign exchange reserves, China's totalled $3.8 trillion U.S. dollars in 2013, a sharp increase from the mid-90s as you can see in the chart below. There are several challenges facing the Asian nation's monetary system too; the multi-currency system which includes the renminbi and the dollar is no easy task to manage.

But how are China's foreign exchange reserves and monetary troubles a driver for gold demand?

For starters, according to the WGC, the majority of growth in China's reserves (implied specifically by the country's current account surplus) has been in U.S. dollars. China used the dollar to buy American debt securities, but upon the global financial crisis and the start of quantitative easing (QE), China has been pulling away from exposure to the dollar.

In a recent article from Casey Research, Chief Economist Bud Conrad even comments on the decline of the dollar's reserve status in foreign countries such as China. He says, "In 2000, the dollar accounted for 55 percent of all foreign exchange reserves. In 14 short years, that number has dropped to 33 percent. By 2020, I project, it will drop to 20 percent. At that point, other large economies of the world won't need dollars nearly as much for international trade."

I believe that government policy is a precursor to change, so as fiscal and geopolitical challenges rise between the two countries, it's no wonder China wants to back away from the dollar and thus, diversify to gold. Gold is a hard asset, making it a prime currency choice for China. In regards to gold, the WGC report even states that, "It cannot be created out of thin air at the whim of central banks. Nor can it be manipulated for the benefit of its issuer."

So what is China up to now?

So perhaps the People's Bank of China is amping up its gold reserves to diversify away from the U.S., but one question remains. Exactly how much gold does China have?

As Mineweb reported this last week, China deemed Beijing as an additional import city for gold, a clear indicator even more of the precious metal will find its way into the country. China does not release any official numbers about its gold imports, so Beijing will be another source of unpublished data. Rather than reporting its own gold traffic, other countries report their gold export data to China. Hong Kong provides insight into China's gold holdings and in February I wrote how Switzerland released its gold trade data this year for the first time since 1980. Only through these alternate reports can we infer the amount of gold China truly holds.

No matter the exact amount of gold that China has, this country is a good example that the demand drivers for gold remained the same. People around the world react with concern over government policies that can devalue currencies, thus making gold attractive. Similarly, as economies flourish and people have money, they will spend it on gold. The Love Trade will also continue; consumers will purchase gold as gifts as long as cultural celebrations and religious traditions carry on.

It's important to follow the money, or in this case the gold, to see how people around the world react to this rare commodity. Looking forward, stay curious as an investor and you'll see if China can keep the key to the gold market.

Article By: Frank Holmes

Key Events In The Coming Very Busy Week

The coming week will be busy in terms of data releases in the US

CALENDAR

Monday, April 28

• Events: ECB’s Noyer holds press conference; Debate of candidates for European Commission Presidency.
• United States | Pending Home Sales MoM (Mar): Consensus 0.70% (-10.20% yoy), previous -0.80% (-10.20% yoy)
• Italy | Consumer Confidence Index (Apr): Consensus 101.2, previous 101.7
• Sweden | Retail Sales MoM (Mar): Consensus 0.20% (2.70% yoy), previous 0.40% (2.50% yoy)
• Israel | MPC: rates are expected to remain on hold,
• Thailand | Mfg Production Index ISIC NSA YoY (Mar): Consensus -7.80%, previous -4.40%
• Turkey | Consumer Confidence Index (Apr): Previous 72.7
• Also interesting: [DM] US Dallas Fed Manuf Activity Index; UK Hometrack Housing Survey; Germany Import Prices; Sweden PPI and Trade Balance; Japan Retail Trade; Hong Kong Trae Balance [EM] Trade Balance in Colombia, Mexico and Thailand; Leading Index in China and Taiwan.

Tuesday, April 29

• Events: US SEC’s White testifies; EU’s Van Rompuy presents book on Euro crisis; IMF releases Europe Spring Regional Economic Issues Report; French Parliament votes on Hollande spending cuts.
• United States | Consumer Confidence Index (Apr): consensus 83.0, previous 82.3
• United States | S&P/CaseShiller Home Price Index NSA (Feb): Consensus 0.6%, previous 0.8%
• United States | GS Analysts Index (Apr): Previous 56.5
• Germany | GfK Consumer Confidence (May): Consensus 8.5, previous 8.5
• France | Consumer Confidence (Apr): Consensus 88, previous 88
• Germany | CPI EU Harmonized MoM (Apr P): Consensus -0.10% (1.30 yoy), previous 0.30% (0.90% yoy)
• United Kingdom | GDP QoQ (1Q A): consensus 0.90%, previous 0.70%
• Hungary | MPC: We expect another cut in rates by 10bp (from 2.60% to 2.50%). We also expect the MPC to announce the end of the easing cycle and to use non-rate tools from now on to ease financial conditions, support lending to the private sector and demand for government bonds, and to anchor the yield curve.
• Also interesting: [DM] Euro area consumer, economic, and industrial confidence; Euro area M3 Money Supply; Italy Retail Sales and Business Confidence; UK Services Output; NZ Overseas Merchandise Trade; Spain Unemployment; Germany various regional CPI; Sweden Economic Tendency Survey [EM] South Korea BoP CA; Brazil IGP-M Inflation and Bank Lending.

Wednesday, April 30

• Events: BoJ’s Kuroda press briefing after outlook report; Speeches by EU’s Van Rompuy and Barroso, former Fed Chair Bernanke.
• United States | ADP Employment Change (Apr): consensus 210K, previous 191K
• United States | Employment Cost Index (1Q): Consensus 0.50%, previous 0.50%
• United States | GDP Annualized QoQ (1Q A): consensus 1.10%, previous 2.60%
• United States | Personal Consumption (1Q A): consensus 1.90%, previous 3.30%
• United States | Chicago Purchasing Manager (Apr): consensus 56.5, previous 55.9
• United States | FOMC: Consensus expected a $10 billin reduction in monthly taper to $45 billion
• Euro area | CPI Harmonized MoM (Apr P): previous 0.50%
• Italy | CPI EU Harmonized MoM (Apr P): Consensus 0.50% (0.5% yoy), previous (r) 2.20% (0.30% yoy)
• Spain | GDP QoQ (1Q P): GS 0.30%, consensus 0.40%, previous 0.20%
• Spain | CPI EU Harmonised YoY (Apr P): Consensus 0.30%, previous -0.20%
• United Kingdom | GfK Consumer Confidence (Apr): Previous -5.0
• Japan | MPC: The BoJ is expected to keep monetary policy unchanged. In the press conference following the previous meeting, the Governor stressed that there was no need for monetary easing for now, and given that few economic data in the wake of the VAT hike have been published yet, additional easing seems unlikely.
• Japan | Industrial Production MoM (Mar P): GS 0.70%, consensus 0.50%, previous -2.30%
• Japan | Housing Starts YoY (Mar): consensus -2.90%, previous 1.00%
• Canada | GDP MoM (Feb): Consensus 0.20%, previous 0.50%
• Australia | Private Sector Credit MoM (Mar): consensus 0.40%, previous 0.40%
• New Zealand | ANZ Business Confidence (Apr): Previous 67.3
• South Korea | Industrial Production SA MoM (Mar): consensus 1.00%, previous -1.80%
• Taiwan | GDP YoY (1Q P): consensus 3.08%, previous 2.95%
• Ukraine | GDP YoY (1Q P): consensus -1.60%, previous 3.30%
• Also interesting: [DM] Germany Retail Sales and Unemployment Change; France Consumer Spending and PPI; Unemployment in Norway, and Italy; Spain CA; Switzerland KOF Leading Indicator; New Zealand Building Consents Issued; Japan vehicle production; South Korea Business Survey; Singapore Unemployment [EM] Israel unemployment; Trade Balance in Turkey, South Africa and Thailand; Mexico Bank Lending; Chile Manufacturing Index, Retail Sales, and Unemployment; Argentina Construction Activity; Colombia Unemployment.

Thursday, May 1

• Events: Speeches by Fed’s Yellen, BoE's Cunliffe.
• United States | Personal Income (Mar): consensus 0.50%, previous 0.30%
• United States | Personal Spending (Mar): consensus 0.60%, previous 0.30%
• United States | PCE Deflator MoM (Mar): consensus 0.20%, previous 0.10%
• United States | PCE Core MoM (Mar): consensus 0.20%, previous 0.10%
• United States | Construction Spending MoM (Mar): consensus 0.60%, previous 0.10%
• United States | ISM Manufacturing (Apr): consensus 54.2, previous 53.7
• United States | Domestic Vehicle Sales (Apr): consensus 12.80M, previous 12.78M
• United Kingdom | Mortgage Approvals (Mar): Consensus 72.0K, previous 70.3K
• United Kingdom | Markit UK PMI Manufacturing SA (Apr): Consensus 55.4, previous 55.3
• China | Manufacturing PMI (Apr): consensus 50.4, previous 50.3
• South Korea | CPI YoY (Apr): consensus 1.50%, previous 1.30%
• South Korea | Exports YoY (Apr): consensus 5.00%, previous (r) 5.10%
• Thailand | CPI YoY (Apr): Consensus 2.30% (0.26% mom), previous 2.11% (0.22% mom)
• Peru | CPI MoM (Apr): consensus 0.28% (3.40% yoy), previous 0.52% (3.38% yoy)
• Also interesting: [DM] UK Nationwide House Prices; Australia RP Data House Prices and Commodity Index; Denmark Unemployment and Danish PMI Survey [EM] South Korea Trade Balance.

Friday, May 2

• Events: Speech by EU’s Barroso; Norway sovereign debt rating published by Fitch, S&P.
• United States | Change in Nonfarm Payrolls (Apr): GS 220K, consensus 215K, previous 192K
• United States | Unemployment Rate (Apr): GS 6.60%, consensus 6.60%, previous 6.70%
• United States | Change in Private Payrolls (Apr): GS 215K, consensus 210K, previous 192K
• United States | Average Hourly Earnings MoM (Apr): GS 0.20%, consensus 0.20%, previous 0.00%
• Euro area | Unemployment Rate (Mar): Consensus 11.90%, previous 11.90%
• Euro area | Markit EU Manufacturing PMI (Apr): Previous 53.4
• United Kingdom | Markit/CIPS UK Construction PMI (Apr): Consensus 62.2, previous 62.5
• Japan | Overall Household Spending YoY (Mar): GS 1.00%, consensus 1.70%, previous -2.50%
• South Korea | HSBC South Korea Manufacturing PMI (Apr): Previous 50.4
• Indonesia | CPI YoY (Apr): Consensus 7.28% (0.05% mom), previous 7.32% (0.08% mom)
• India | HSBC India Manufacturing PMI (Apr): Previous 51.3
• Also interesting: [DM] US Factory Orders and ISM New York; PMI Manufacturing in France, Germany, Italy, Norway, Spain, Sweden, Switzerland; Japan Unemployment; Australia HIA New Home Sales; Australia PPI; New Zealand ANZ Commodity Prices; Hong Kong Retail Sales [EM] PMI Manufacturing in Brazil, Czech Republic, Hungary, Indonesia, Mexico (HSBC and IMEF), Poland, Taiwan, Turkey, and South Africa (Kagiso); Mexico Worker Remittances; Trade Balance in Brazil and Indonesia

Source: Goldman, BofA

Spot the nation that just had "major sanctions" handed down to it

What is fascinating is the ramp in US equities managed to catch them up to Russia's post-sanctions outperformance... before they collapsed again... almost as if someone wanted to prove that US was not suffering.

Turnover plunges 70% in first fortnight of this fiscal; CTT, NSEL effects continue to haunt.

The commodities futures market continues to reel under the twin impact of the commodities transaction tax (CTT) and the National Spot Exchange Ltd (NSEL) imbroglio. These developments, which have affected liquidity and discouraged trading, have led to a sharp dip in turnover in the market.

In the first fortnight of this month, the turnover dropped by 70 per cent to ₹2.36-lakh crore from ₹7.87-lakh crore in the corresponding year-ago period.

“Interest in commodities trading has been on a downswing ever since the CTT was imposed in July last year. The immediate effect was the trade turnover falling 40 per cent,” said an analyst.

Sliding turnover

Trade turnover during July 1-15, 2013-14 dropped to ₹4.08-lakh crore from ₹7.87-lakh crore in the first fortnight of that fiscal.

During 2013-14, the trading in commodity futures plunged to ₹101-lakh crore from a record ₹170-lakh crore in 2012-13.

The numbers relate to the six national commodity exchanges (MCX, NCDEX, MNCE, ICE, ACE and USEL) and 10 regional exchanges.

The Centre imposed a 0.01 per cent CTT from July 1, 2013 on all non-agricultural commodities such as gold, silver and metals. The CTT for a trade worth ₹1 lakh is ₹10.

350% expensive

Traders feel that the CTT has made exchanges 350 per cent more expensive. “Imposition of CTT has increased the cost of hedging and trading. Because of the high cost on commodity exchanges, small and mid-size traders are shifting to illegal (dabba) trading,” said Sandeep Jain, Director of Tradeswift Commodities.

“The NSEL imbroglio in August further brought down the turnover by another 10 per cent. It has shrunk the money available in the commodities market. Besides, the imposition of additional margins by the Forward Markets Commission, which regulates commodity trading, on various products also affected trading,” said the analyst.

Naveen Mathur, Associate Director (Commodities and Currencies) at Angel Commodities Broking, said that apart from the CTT, the NSEL episode sapped investor confidence. “Besides, the past few months we have witnessed low volatility in some of the major commodities. This, along with equity markets touching new highs, has resulted in commodities trading taking a hit,” he said.

Shift to equity

There has been a shift towards the equity market as the Sensex rises with each passing day, said a trader. The Sensex had surged to record 22,939.31 last week before retreating to 22,631 on Monday.

Genuine physical market hedgers and international reference jobbers are also missing from the commodities exchanges. “Only small-time jobbers and traders are left, and this particular category of participants needs volatility to trade, which has been missing for quite some time,” he said. Commodities trading saw some improvement during January-March after the additional margins were removed.

Besides, the Forward Markets Commission permitted high-frequency trading in mini- and micro-contracts from January. “These improved trading before the interest waned in the first fortnight of April,” said the analyst. During January 16-31, trading on the commodities exchanges increased to ₹3.74-lakh crore from ₹2.77-lakh crore during December 16-31. In the first fortnight of March, the turnover was ₹3.43-lakh crore.

Poll effect

Elections and non-participation of industrial hedgers, too, are affecting commodity trading. Also, prices of key commodities such as gold, crude oil, and metals are ruling flat, leading to lack of interest among the trading community.

According to Vandana Bharti, Assistant Vice-President (Commodities) at SMC Global Securities, “If a stable government is elected, then we may see some increase in the prices of base metals and energy products. The bullion counter may see some decline as the haven appeal will decline. Further, if the newly-elected government goes for an import duty cut, then we may see a further decline in bullion prices.”