After scandal, copper price could follow iron ore over cliff

The copper price dropped 3.5% last week after a weaker than expected gauge on manufacturing activity in China together with a probe into the use of metals in trade finance deals rattled the market.

July copper futures in New York ended the week at $3.0585 a pound ($6,700 a tonne), down from $3.37 at the outset of 2014.

Chinese authorities have begun an investigation into allegations that several companies pledged the same copper and other industrial metals held at the port of Qingdao as collateral for loans to different banks.

Beijing is stepping up efforts to curb the country's vast shadow banking system and the revelations could see a further clampdown on this lending practice which have been a key part of the commodities trade – particularly in iron ore and copper – for years.

As these deals are being unwound it could lead the dumping of copper onto the market that would otherwise have been tied up in financing deals leading to sharply lower prices.

Down 20% over the past month, the process of unwinding is already playing itself out on the iron ore market

The process is already playing itself out in iron ore which has slumped 20% over the past month. Iron ore was hit first because apart from the credit clampdown China is also targeting the steel industry's chronic overcapacity and environmental impact as part of its "war on pollution".

While iron ore at the China's ports continues to be stockpiled at record levels, official copper inventories have been sharply reduced over the past couple of months.

However, while deliverable stocks held by the Shanghai Futures exchange has dropped to 92,000 tonnes it is estimated that China's unofficial copper stocks used in financing could be as high as 700,000 tonnes according to a new report by Capital Economics meaning the tightness in the market has been artificial.

While iron ore imports slowed to 77.4 million tonnes in May, down 7.2% and copper imports fell 15.6% from a month ago to 380,000 tonnes, year on year imports are still expanding at a rapid rate.

Should the stockpiles of iron ore of more than 110 million tonnes and the "off-market" copper warehouse inventories be released, both commodities have further to fall.

China's unofficial copper stocks used in financing could be as high as 700,000 tonnes

Iron ore has recovered somewhat after falling to a 21-month low of $92 a tonne end of May and copper is still trading well above near four-year lows of $2.92 hit in March.

Copper plummeted 8% over just three trading days during the March slump which was prompted by China's first ever corporate bond default and markets could now be entering a particularly rough patch as banks start to call in dubious loans.

Capital Economics sees the correction this way:

"If the historic relationship between copper and iron ore prices is to be restored, it is likely to take the form of a renewed fall in copper prices."

The research house predicts "another leg down in the copper price" to $5,800 per tonne ($2.63 per pound) by the end of the third quarter, while the iron ore price is forecast to end the year at $90 per tonne.

Now, electric car fit with aluminum-air battery that can travel 1,000 miles on a single charge

Battery developer Phinergy and metal manufacturer Alcoa have teamed up to demonstrate their aluminum-air battery in a small electric vehicle at Circuit Gilles Villeneuve in Montreal, which could make it travel 1,000 miles on a single charge.

The test car, which appeared to be using the body of a Citroen C1, used lithium-ion and aluminum-air batteries for the run. But the question of whether or not it makes sense to take this little EV on a 1,000-mile road trip is not quite that simple.

The aluminum-air battery is lightweight, and more energy dense than the lithium-ion batteries in use today. The product of the aluminum anode, ambient air (oxygen) cathode and water electrolyte is an electrical charge the power the car, and the resultant aluminum hydroxide byproduct is recycled to create more aluminum. When the aluminum-air battery is depleted, the modular aluminum "cartridges" can be swapped out for new ones at a service station.

The aluminum-air battery isn't something you can recharge at home.

So no, the aluminum-air battery isn't something you can recharge at home (or at all, really), but its simplicity of management and closed-loop life cycle are impressive. Furthermore, it offers a shelf life of 20 to 30 years. If used as a range extender in a car using a lithium battery as its primary energy source, like this particular vehicle, it could be quite practical, and give drivers a carbon-free option for backup power.

So, depending on the cost of the aluminum-air batteries, and the availability of service stations, vehicles like Alcoa-Phinergy car could be used for 1,000-mile trips. In all practicality, though, the aluminum batteries make the most sense when compared to gasoline-range extended vehicles, and there's nothing wrong with putting a much cleaner energy option on the table. If this aluminum-air tech gets legs - and demand - the idea of it becoming a primary source of power for long-range vehicles could be in our future, too. 

Copper Mining Giant, Newmont Invokes Force Majeure at Its Batu Hijau

Mining giant Newmont Nusa Tenggara in the U.S said during Thursday that it has notified the government that it was declaring force majeure at its Batu Hijau Copper mine, located in West Nusa Tenggara.

The company also decided to grant leave with reduced pay for most of their employees in the mine.

Newmont and its U.S partner Freeport Indonesia, which contributes about 97 percent of Indonesian copper production, is in arguments in the government recently for imposing an export tax on January.

The controversial export tax was imposed by the government on the miners that used to export semi-finished minerals in order to force to produce their own ores locally and thereby increasing the value for the country.

Martiono Hadianto, Newmont Nusa Tenggara CEO said that despite their best effort, they had not been export copper concentrate since January, and they still did not have an export permit. He added that they had no other option other than to declare force majeure.

The company will go on with the selling of copper concentrate to PT Smelting at Gresik, Indonesia’s only copper plant from its storage, throughout this year, based on the company report that came after a new government drive to force a breakthrough.

SocGen 10-Year Outlook: 100% Chance Of Recession; S&P To 4,000 Or 500

No matter what, SocGen sees US equity performance over the next 10 years as modest at best.They note that US equities face three headwinds: cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory, corporate margins stand at historically high levels, and after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years). While their central case is 'moderate growth and inflation', they project a possible high growth surge to 4000 for the S&P 500 and a deflation scenario which would put the S&P 500 at 500 (-12% per annum).

Via SocGen,

This is the second edition of our 10-year equity outlook. The first was published in July 2009, when the economic consensus was still weighing up deflation fears and valuations were depressed (read: an excellent entry point.). At the time we set an S&P500 target of 1300 under our central scenario (in mid-June 2009 it was 923).

[ZH: So in 2009 they forecast the S&P to be at 1300 in 2019... and we are now 50% higher than that already!!]

US equities

US equities face three headwinds:

cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory,

corporate margins stand at historically high levels, and

after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years).

A recession costs on average a 22% drop in US earnings

The most recent economic recession triggered by the collapse of Lehman Brothers caused an unprecedented wave of US earnings downgrades and was comparable in effect to the two previous oil shocks, the Gulf war and the Dot-Com bubble burst.

But US equities have supports as well, such as impressively strong balance sheets and the beginning of a new M&A cycle, backed by a highly reactive central bank.

Central scenario: moderate economic growth and inflation

Our central scenario projects moderate underlying economic growth of 5% per year over the next few years, i.e. below the long-term growth trend (8.6%). We have also adopted a scenario whereby inflation will gradually increase at a modest rate, until it pushes down the normalised 10-year moving P/E rate slightly, to below its long-term average of 20x. Based on these assumptions, we expect the S&P 500 to rise by +3% p.a. and reach 2500 points in 10 years.

But there are 3 Altnerative Scenarios...

Alternative scenario 1: sharp growth & high inflation +2%/yr

In a high inflation scenario, two opposing forces go head to head: on the one hand, inflation prompts an acceleration in (nominal) reported corporate profits and, on the other, it reduces equity valuations. The combined forces would be likely to have a positive impact on equity markets (+2%). In this scenario, while nominal returns are positive, real returns would be eaten up by inflation.

Alternative scenario 2: sharp growth & moderate inflation +8%/yr

In this scenario, the equilibrium between growth and inflation would be well managed by the central banks and /or the US gas shale revolution would help maintain inflation within a low range. This is a kind of continuation of the trend we have observed over the last couple of years in the US. On this assumption, equity market P/Es would remain high and corporate profits would accelerate rapidly. Our scenario would yield an annualised equity index slope of about 8%, pushing the S&P 500 to 4000 points at the end of the period.

Alternative scenario 3: depression -12%/yr

We have no doubt that a deflation scenario, like that of the 1930s in the US, would considerably damage corporate profits and the equity market valuation, eventually impacting the equity markets themselves. We saw this in Japan between 1995 and 2005, when the collapse in listed Japanese company ROEs severely cut into their equity valuations and thus the Nikkei index. We believe such a scenario would put the S&P 500 at 500 points in 10 years (-12% p.a.).

Chinalco Yunnan Copper Resources Discovers New Copper-Gold Zone in Mt Isa Region

Chinalco Yunnan Copper Resources Ltd has discovery a new copper-gold zone at Jubilee and made a further confirmation of a potentially large mineralized system at Millenium. The Millenium prospect is Chinalco Yunnan Copper Resources’ major drill target for 2014. The prospects are at the Mt Isa region in Queensland

They explored a significant zone of high grade primary copper sulphide and gold at Jubilee. The discovery highlighted with a 4 meter at 4.29 percent copper, .17 g/t gold intersection from 80 meters, which also includes 1 meter at 10.7% copper and 1.37 g/t gold.

It also found out a wide and strong anomalous zone of around 50 to 60 meters which includes 5 meters 0.98% copper, 0.5g/t gold and 5 g/t silver and this added a further confirmation on the existence of high end mineralization at Millenium prospects.

These exploration results provide validation of the CYU model at Blue Caesar that mineralization of primary copper sulphate extends to the north of prior drilling process. In addition of these findings, it also found out reconnaissance rock chip assays up to 20% copper, 1.7g/t gold and 3.2g/t silver at the King Solomon project.
Further exploration would be done in these key targets regions in the next few months. 

ECB Decision-Day Guide (In 5 Simple Questions)

As we have heard numerous times this year already, tomorrow may be 'another' most important day of the year/cycle as Mario Draghi and his band of merry men at the ECB appear to be finally cornered (by market exuberance, macro weakness, and excess positioning) into "doing" something as opposed to just talking about it. While we have discussed the ins and outs of the potential for a small focused ABS bailout QE,negative rates, and why whatever Draghi does tomorrow will have minimal impact on the real economy; Bloomberg provides a quick and easy guide to the five things to watch for from Mario Draghi today.

1. Which interest rates will Draghi cut, and how far?

While all but two of 60 economists surveyed by Bloomberg News predict a cut in the main refinancing rate from the current record-low 0.25 percent, they’re divided over the size of the reduction. Twenty one economists predict the ECB will lower its benchmark by 10 basis points to 0.15 percent; 34 analysts forecast a cut by 15 basis points to 0.10 percent. Three expect the rate to fall even further.

The majority of economists in a separate survey predict the ECB will become the first major central bank to introduce a negative deposit rate, with 32 of 50 analysts saying the rate will be cut to minus 0.10 percent and 12 forecasting a reduction to minus 0.15 percent. Such a move would weaken the euro, which has appreciated 4 percent against the dollar in the past 12 months. Only six economists see the ECB keeping the deposit rate at zero.

2. Which non-standard measures is Draghi debating?

Policy makers are contemplating a package of measures, and analysts from Goldman Sachs Group Inc. to Nomura International Plc expect a rate cut to be complemented by tools aimed at reigniting credit supply. “The combined use of several monetary-policy instruments is conceivable,” Executive Board member Peter Praet said in an interview with Die Zeit.

Longer-term loans to banks conditional on increased lending to companies may take center stage, with a program modeled on the Bank of England’s Funding for Lending Scheme being one option officials have discussed. Other measures up for debate include the suspension of sterilizing crisis-era bond purchases, changes in reserve requirements and collateral policy and an extension of the fixed-rate, full-allotment regime currently scheduled to be in place until July 2015, under which banks can borrow as much cash as they like against eligible collateral.

3. How serious is the threat of deflation in the euro area?

Inflation, which the ECB aims to keep just under 2 percent, has remained below 1 percent since October and slowed to 0.5 percent last month. In March, the ECB predicted it won’t return toward its goal until the end of 2016. Draghi is set to unveil new staff projections on prices, growth and unemployment that may force the ECB further into uncharted territory.

4. What can the ECB do later in the year if the situation worsens?

Draghi said on April 24 that large-scale asset purchases would be justified if the medium-term outlook for inflation worsens. Any program would target a mix of assets to reduce “term premia across markets and jurisdictions,” Executive Board member Benoit Coeure said on April 13.

The ECB and Bank of England have called on regulators to ease rules on asset-backed securities in Europe. That would provide a broader range of funding options for companies and create assets the ECB could buy to supply liquidity.

5. What else is on the ECB’s agenda?

Draghi may be quizzed on the progress the ECB has made on minutes. Officials started drafting trial versions earlier this year and are debating a reduction in the frequency of rate-setting meetings once they start publishing the accounts.

Developments in the ECB’s comprehensive assessment of the banking system may also be a topic in the press conference, in particular in how it may take account of rising legal costs after U.S. authorities threatened to levy a $10 billion dollar fine on BNP Paribas SA for breaching trade sanctions. In addition, the place of Dexia SA, the bailed-out French-Belgian lender, in the Comprehensive Assessment may be raised, after the ECB supervisors decided to exempt it from a stress test.

*  *  *

And so while they are the key five questions... here is what the world is hoping for / expecting...

"Copper's Long-Term Bear Trend Is Resuming" BofAML Warns

"Copper is breaking down," warns MacNeil Curry as BofA's technical strategist ignores the hyped hopes of newsletter-peddlers who see Dr. Copper's recent rise as indicative of a Chinese renaissance.

As Mike Tyson so philosophically noted, "everyone has a plan until they get punched in the mouth," and that 1-2 punch just hit Copper square in the jaw as macro data disappoints and the reality of a vicious circle of unwinding a rehypothecated commodity financing ponzi comes to bear. How much of copper's rise was artificially-created by CCFDs is unknown but as Curry notes, "the downtrend is resuming" and we will soon find out.

Get ready to sell Copper

Copper is breaking down. The completed 3wk Head-and-Shoulders Top and break of 2.5m trendline support (now 6801) says that the larger downtrend is resuming. A closing break of trendline support confirms, targeting 6321 (Mar-19 low and below).