Is August a better month for Commodities?

Commodities collectively had their worst monthly performance in more than two years during July and the group could push somewhat lower in August. 
According to INTL FCStone, August as usually a messy month for equities leading to an even sloppier September. 

“If we are correct on our view on U.S. equities, we could see spillover selling hitting precious metals, oil, and some of the base metals, at least initially, before the various asset classes start to decouple,” said INTL FCStone in its monthly outlook. 

INTL FCStone's Precious Metals and Energy Outlook for August
Gold is already struggling under the prospect of decent growth in both China and the US lackluster investment demand, poor technicals and the likelihood of higher U.S. rates going into 2015.

Platinum and palladium could also ease a bit this month, although their fundamentals look much better than gold. Oil markets are oversupplied and with various geopolitical hotspots not imperiling oil flows, at least for the moment, we think the path of least resistance is lower still. 

INTL FCStone believes that lower trading ranges are also in store for energy products, as well as for natural gas. 

INTL FCStone's Base Metals Outlook for August
Base metals have regained some lost ground this week, but INTL FCStone thinks that some in the group are overextended based on fundamentals. 
Zinc, in particular, is now at a three-year high and INTL FCStone believes prices have more than discounted the complex’s improving supply/demand profile, while not adequately discounting the very real possibility of a further contraction in the Chinese real estate market.

However, INTL FCStone said lead has not participated fully in the recent base metals advance and we still like its story heading into the second half of the year. 

The firm describes itself as neutral on copper at current prices, looking for a sideways range this month.

Peru calls off ban on Tia Maria

Tia Maria copper mine has been stalled since 2011 due to the protest from the residents claiming that the working of mine may contaminate the drinking water facility of the neighborhood.

As the mine being one of the biggest mining projects issued in Peru, the ministry has not decided letting go off the project easily. Mines and Energy ministry of Peru announced on Monday that the environmental impact study based on the project has been approved by the government.

Many Projects in Peru has been put on hold due to the violent protests held by the residents and environmental activists. Even though Peru is a large reserve of minerals like gold, silver, zinc and copper, due to these protests and hardships from the residents, nothing is fully utilized.

One of the world’s biggest producer of copper, Southern Copper have stated that, the project Tia Maria will annually produce at least 120,000 tons of copper and will last for at least a period of twenty years. Oscar Gonzalez Rocha, the chief executive of Southern Copper said that they are hoping to start the production at Tia Maria by 2017; mostly at the beginning of the year. He also added that, the company is still to receive the license for the project. The project is to be launched at the Southern part of Peru; precisely at Arequipa region. The construction of the plant was stopped due to the protests held regarding the pollution caused by the plant.

According to the government of Peru, the country will most probably produce 2.8 million tons of copper by the year 2016, which is almost double the production of present year, as the government is expecting number of new projects to start their production.

Nickel Stockpiles at Record High as China Turns Exporter

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Nickel inventories in warehouses monitored by the London Metal Exchange extended gains to a record after China, the biggest producer and consumer, shipped more metal out than it imported amid a financing scandal.

Stockpiles climbed to 317,874 metric tons, for a 21 percent increase this year, according to the LME data. Exports of refined nickel from China almost tripled in June to 16,737 tons, exceeding imports for the first time ever by 5,723 tons, customs data show. Nickel is used to make stainless steel.

“The recent build is probably attributable to the pick-up in refined nickel exports that came out of China,” Nicholas Snowdon, an analyst at Standard Chartered Plc in London, said by phone. “That is most likely related to some constraints on financing.”

Nickel has gained the most of the six main metals on the LME this year, rising as much as 56 percent after the largest miner Indonesia banned exports of unprocessed ore, a raw material used to make a lower-grade nickel substitute known as nickel-pig iron. Refined nickel production will exceed demand by 44,200 tons this year before turning into shortage of 97,100 tons in 2015, according to Morgan Stanley.

Prices have pared gains to 35 percent this year, to $18,730 a ton, on speculation that supplies are sufficient for now as stockpiles climbed to a record. The probe into metal inventories held at China’s Qingdao port in June led banks to cut back on financing, leading to more exports.

Less Financing

“It’s entirely possible that metal that was being financed, is now not,” said David Wilson, an analyst at Citigroup Inc. in London. “Financing has been more difficult everywhere because of less liquidity being provided.”

Stockpiles of full-plate cathodes increased 36 percent since the start of June in Johor, and almost doubled in Singapore over the same period, according to the LME data. There are two Chinese companies approved to deliver their nickel cathode into LME warehouses.

Refined nickel approved by the LME is used in about one-third of nickel demand as consumers first use scrap, ferronickel, nickel-pig iron or off-grade material, according to Citigroup. The LME’s network of more than 700 depots worldwide doesn’t stretch to China, the biggest consumer of industrial metals.

Warehouses in Johor, Malaysia, have 157,200 tons of refined nickel, or 49 percent of the LME total and are 38 percent higher for this year. The total LME nickel stockpiles equal about 1.5 months of consumption, Anton Berlin, head of strategic marketing at OAO GMK Norilsk Nickel, said in an interview.

Nickel Briquettes

More than 80 percent of refined nickel stored in Johor is in the form of briquettes, which have been delivered throughout this year. The material probably came from Australia, according to Citigroup.

BHP Billiton Ltd. and Minara Resources Ltd., owned by Glencore Plc, are Australian producers whose brands are approved by the LME, according to the bourse’s website. The metal may not be available for immediate release, Wilson said.

“You’ve had this big build-up of briquettes in Johor,” Wilson said. “I suspect we’ll continue to see those briquettes being built. Whether they’re actually available is a very different question. They’re not necessarily available to everybody unless they want to pay a decent premium for them.”

Nickel inventories should start to fall by the middle of next year as stainless-steel producers in China are forced to switch from using nickel-pig iron to other forms of nickel and ultimately the refined metal, according to Standard Chartered. High stockpiles will probably cap prices until a shortage takes hold, National Australia Bank Ltd. said in a report Aug. 4.

China's MCC shuts Ramu nickel mine in PNG after attacks

The Ramu nickel and cobalt mine in Papua New Guinea was shut this week by its Chinese owners after it was attacked by villagers on Monday, according to media reports.

The mine, forecast to produce 22,000 tonnes of nickel in 2014, is operated by Ramu NiCo, which is majority owned and run by Metallurgical Corporation of China Ltd 

Ramu NiCo said equipment, including computers, printers, and phones, "costing millions of kina" were badly damaged or removed from its office, according to The Australian newspaper.

One local report said preliminary investigations found the attacks were spurred by concerns about the company's hiring policies for mine workers, while Ramu NiCo has been focusing on training locals to be able to work at the mine.

Minority owner Highlands Pacific's top executives and a spokesman were not immediately available to comment on the situation at the mine.

Bigger Losses May Happen in Base Metal Market if Price Breaks Key Support Levels

The geopolitical risks are escalating now, sending the US dollar index up to a 10-month high. Concerns over global credit risks also combine to shadow the market. As a result, the global commodity market fell across the board. Base metal prices, however, succeeded to find support at key levels.

“If prices fall below those key support levels ( copper 7,030-7050; aluminum 1,980-1990; zinc 2,340-2350; lead 2,230-2240), cash will fly away from the market, and this will trigger bigger losses”, one analyst said. He added that prices will fall back from initial highs as the second half of 2014 goes on. 

Commodity Currencies

Keeping an eye on the currencies of big commodity producing nations not only provides us insight into demand for commodities but the health of emerging markets as well.

Canadian dollar

Canadian Dollar (CAD) was turned back at the 38.2% retracement of the 2012 decline (part of the 2011 bear market). With the break of the bear flag last week it appears the bear market rally is over.

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Australian Dollar

Australian Dollar (AUD) has been like watching paint dry since April. As long as support at 0.92 remains intact we have to assume the bear market rally is too. But with the break down in the CAD the Aussie is probably on borrowed time.

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The secular bear cycle in commodities is due to end near the end of this year.

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What to expect from Base Metals this week ?

Shanghai Metals Market expects base metals to follow divergent trends this week, but optimistic expectations surrounding upcoming economic releases should favor some prices trending up.

China Impact

China’s State Council issued guidance on reform of the household registration (“hukou”) system July 30. The proffered guidance indicates that household registration restrictions will be abolished in towns and smaller cities first. The government also indicated that it would loosen residence registration requirements in mid-sized cities “in an orderly manner”, while a points system will be established to control the number of migrants moving to cities with populations over 5 million.

Reform of the household registration system is expected to boost infrastructure construction, as well as consumption of medical care, education, cars, home appliances, and housing in general. That, plus increased investment opportunities, should bolster demand for metals. Analysts estimate reform of the household registration system to contribute 5% to GDP growth over the next six years.

US Impact

The US Federal Reserve agreed to cut bond purchases another USD 10 billion/month after its two-day policy meeting for July, but offered no clearer indication as to when it might raise rates. Although the Fed acted calmly after US Q2 growth proved brighter than expected, it did express greater optimism over the labor market and inflation. This upbeat assessment may help bolster the market.

Source: Shanghai Metals Market