Lead: Will it benefit from bitter cold in US, EU?

Snowstorm slammed some parts of the US, with temperatures plummeting, while central and northern Europe are expected to experience a colder winter this year. Will this extreme cold help lead prices repeat the rally seen in the last two winters?

The inclement weather in the winter of 2012 had boosted demand for ignition batteries and posed difficulty in scrap battery recycling. In response, LME lead neared a four-year high of $2,499 per tonne at the beginning of 2013. The same reason pushed the prices to a high of $2,289 a tonne in December 2013.

How about this year?

"We did see some positive signs," Zhu Rongrong, analyst with Shanghai Metals Market said.

LME cash-to-3-month contango fell to $3 per tonne last Friday, its lowest this year. Meanwhile, lead stocks in LME-approved warehouses have declined more than 10,000 tonnes so far this month. Physical lead premia in Europe and US posted noticeable rise in October, according to CRU data.

On the demand side, some European ignition battery makers have reportedly begun hoarding lead ingot against expectation for a colder winter. Besides, LMC Automotives said automobile sales in the US climbed 10% year-on-year January-September, and are expected to rise 5% throughout the year.

That being said, the road to a rebound may not be so easy.

"Something to take note of is news on smelter shutdowns, a part from the bitter cold, also contributed to the jump in prices in the past two winters," said Zhu.

Exide Technologies closed its 75,000 tpy secondary lead smelter in Frisco, Texas, in late 2012. Doe Run Company shut down its primary lead smelter in Herculaneum by the end of 2013. The smelter produced 110,000 tonnes of primary lead in 2013. Nonetheless, no closures have been reported thus far this year.

Moreover, a sharp rise in lead imports left lead supply ample in the US. The US imported 319,000 tonnes of refined lead in the first eight months, up 53% from a year ago. Now that traders are holding considerable stocks, goods availability in the country’s physical market will be subject to selling interest.

China Manufacturing PMI Misses, Slides To 6 Month Lows

For the 13th month in a row, according to Bloomberg data, China Manufacturing PMI missed expectations. Printing at a 6-month low of 50.0 (against expectations of 50.2), the most notable individual component was the slump in output to a contractionary 49.5 reading for the first time since May. New export orders (umm US decoupling?) also dropped. It seems after last month's idiocy (take a look at these charts for a good laugh), that Japan's Manufacturing PMI is also catching down to reality having missed expectations and dropped to 52.1. Chinese and Japanese stocks are tumbling after this data (with Nikkei 225 200 points off US day session closing levels).

13th miss in a row, 6 month lows...

As Output and New Export Orders eased...

Not pretty...

Time to demand some moar stimulus...

"New export order growth continued to ease and led to a below-50 reading for the output sub-index for the first time since May.

Disinflationary pressures remain strong and the labour market showed further signs of weakening. Weak price pressures and low capacity utilization point to insufficient demand in the economy. Furthermore, we still see uncertainties in the months ahead from the property market and on the export front. We think growth still faces significant downward pressures, and more monetary and fiscal easing measures should be deployed.”

The reaction...

Charts: bloomberg

India may restrict Gold imports

The world's biggest bullion consumer India’s Ministry of Finance may announce measures to restrict gold imports, said. 

Citing industry sources, Commerzbank said the Reserve Bank of India is strongly supportive of new import restrictions following news that the value of gold imports in October soared by 280% year-on-year to $4.2 billion. 

“That said, this is partly due to a base effect. Any further limitation of gold imports would probably also lead to increased smuggling, which cannot be the Indian government’s intention. In addition, Indian jewelry retailers could increasingly resort to silver,” 

Another curve ball for Indian gold demand
According to ETF Securities, after loosening some of the restrictions on gold imports in May, the Indian government may re-tighten amid a strong resurgence in gold import demand. The Finance Ministry and central bank met last week to discuss without a decision, agreeing to reconvene soon. 

ETF Securities believes the short-term impact of the discussions will be for consumers to increase purchases before any re-tightening. Historically, tighter restrictions have led to the price of gold being substantially higher in India than elsewhere. 

Higher premiums that could follow a potential tightening of restrictions will how ever dampen demand going forward, reducing come of the support for the gold price in 2015.

Since 2011, India and China have been locked in a contest to become the world’s biggest consumer of gold, a position that Asia’s third largest economy recovered recently.

According to World Gold Council, for the three months ending September, India emerged as the biggest gold consumer in the world, buying 225.1 tonnes worth gold in jewelry, bars and coins.

India: A surge in Gold imports widens trade deficit in October

India's merchandise trade deficit widened to $13.4 billion in October from $10.6 billion a year ago, as gold imports quadrupled on year-on-year (y-o-y) basis while exports fell by 5% y-o-y. Non-oil non-gold exports – an indicator of domestic demand – continued to expand although at a significantly slower pace compared to September. However, a 19% y-o-y fall in oil imports due to lower crude oil prices -$87/barrel (Indian basket) in October 2014 vis-à-vis $107.4/barrel in October 2013 - helped to cap the rise in trade deficit in October.

Despite the expected widening in CAD in Q2, we forecast for India's CAD at $32 billion (1.5% of GDP) for FY15, similar to FY14. Lower oil prices and continued restriction on gold imports will help to keep the CAD in check. CRISIL Research expects oil prices to average $100-105 per barrel (Brent) in FY15. Oil imports constitute nearly one third of India's total merchandise imports. Therefore, lower oil prices will significantly bring down total imports. With the Fed tapering having ended, a faster-than- expected increase in interest rates in the US, if it were to happen, could trigger capital withdrawals from emerging economies including India. To reduce India's vulnerability to any such external shocks we believe that the government is likely to continue with import curbs on gold.

Indian gold imports jumped to 106.3 tonnes ($ 4.2 billion) in October – the highest monthly imports this fiscal year, from 26 tonnes ($1.1 billion) a year ago. Higher demand spurred by the festive season and low prices (Rs 1222.5/troy ounce vis-avis Rs 1316.2/troy ounce a year ago) is likely to have led to the rise in imports of the yellow metal. 

The RBI and government officials are believed to be re-evaluating current restrictions on gold imports to identify and plug possible loopholes in the import policy. In FY14, the government raised imports duty on gold to 10% and made it mandatory for 20% of all gold imports to be held for exports of jewellery. According to CRISIL Research, gold imports for FY15 are likely to touch 800 tonnes – higher than 653.5 tonnes last fiscal despite these restrictions.

Total imports rose by 3.6% y-o-y in October. While oil imports declined, non-oil imports grew by 18.9% y-o-y in October led by both higher gold and well as higher core (non-oil non-gold) imports.

Core (non-oil, non-gold) imports rose by 5.6% y-o-y in October – expanding for the sixth consecutive month. Prior to this, core imports had been falling consecutively since May 2012, with the exception of a few months (Figure 1). Sustained growth in core imports in the past few months confirms that a nascent recovery in domestic demand has begun. However, the numbers are still too weak to provide a relief.

Slower growth in exports in October can be partly explained by a high base effect (Figure 2). Export growth in the same period a year ago had surged to 14.3% y-o-y. For the rest of this fiscal year, the base effect is likely to turn favourable as export growth fell sharply in the period November 2013-April 2014, averaging a mere1.9% y-o-y during this period. 

The largest drag to export growth came from engineering goods (-9.18% y-o-y), pharmaceuticals (-8.33% y-o-y), gems and jewellery (-2.25% y-o-y) and cotton yarn exports (-13.84% y-o-y). Petroleum products exports also declined but only marginally (< 1% y-o-y).

Global zinc market in deficit during Jan-Sep '14: ILZSG

The latest statistics published by the International Lead and Zinc Study Group (ILZSG) indicates that global refined zinc market was in deficit of 309,000 tons during the initial nine-month period in 2014.

According to ILZSG data, the zinc deficit situation in international market has surged higher significantly when compared with the total deficit of 5,000 tons during the corresponding nine-month period in 2013.

During Jan-Sep '14, global refined zinc output totaled 9.95 million tons, whereas the consumption totaled 10.26 million tons.

Earlier, the group had predicted the global zinc demand to increase by 5.1% in 2014 to 13.65 million tons. It also foresees further growth of 2.08% in 2015 to 14.05 million tons. The demand from China is expected to improve further on the backdrop of increased production of galvanized sheet. Meantime, the demand from world countries excluding China are expected to remain muted.

ILZSG also forecasts the global zinc production to grow by 1% to 13.33 million tons in 2014 and by another 3.8% in 2015 to 13.80 million tons.

Calling for a Copper Surplus? Not So Fast

When it comes to the copper market, analysts are always looking at whether there will be a surplus or a deficit. Of late, many have been calling for a continued surplus, including Thomson Reuters GFMS, which in October released an update to its 2014 copper survey, suggesting that it is unlikely the market will shift into deficit in 2015. Likewise, though the International Copper Study Group (ICSG) has revised its copper supply-usage forecast down substantially, the group is still definitely calling for a surplus.

But as with most things, there is always a flip side. Indeed, there are analysts who argue that the copper market will face a deficit sooner than many think.

Lower LME stocks

The Financial Times reported on October 28 that copper stocks at London Metal Exchange (LME) warehouses have fallen by 55 percent this year, hitting 161,050 tonnes, or about three days’ worth of global consumption.

To be fair, that figure alone does not signify a copper deficit. As Haywood Securities analyst Stefan Ioannou has pointed out, the LME may be the most transparent inventory, but it’s just one piece of the much larger copper market pie.

However, the exchange is still a valuable indicator when looking at the copper market, especially when one buyer (rumored to be London’s Red Kite Group) appears to be holding 50 to 80 percent of LME copper. In other words, it looks as if there are important players making strategic decisions to purchase copper of late, and it’s worth considering whether a prediction for a tight market is driving those decisions.

China (still) stockpiling

Furthermore, it appears that China’s State Reserves Bureau (SRB) is still stockpiling copper. After buying 200,000 tonnes of copper in March and April, when copper was at its weakest price in years, the Bureau recently placed orders for 150,000 to 200,000 tonnes of copper cathode, Reuters reported. The copper is set to be delivered in the final quarter of 2014 and at the start of 2015.

Reuters columnist Andy Home notes that its difficult to pin down exactly how much copper the SRB buys, and that the Bureau’s practice of rotating out older copper stocks could put a dent in this year’s estimated purchases of 700,000 tonnes. However, despite concerns about slowing economic growth from China, the writer suggests that SRB activity could mean the country has no intention to stop importing copper.

What well-stocked SRB warehouses might mean for the copper price is another consideration, since stockpiled copper can’t be “consumed” by industry in the traditional sense. Still, the Bureau’s buying is an important indicator of demand.

Supply delays

Furthermore, expected ramp ups at some copper mines have seen delays this year, and exports from Freeport-McMoRan Copper & Gold (NYSE:FCX) and Newmont Mining’s (NYSE:NEM) Indonesia operations were briefly stopped due to changes in concentrate export rules. While an October GFMS update points to producers regaining some of the momentum they lost in the first half of the year, the Times notes that increased mine supply has not led to a refined copper surplus. That’s due to raw material bottlenecks caused partly by the situation in Indonesia and partly by a lack of smelting capacity in China.

Rising impurities such as arsenic are also causing problems, since it’s difficult for smelters to process the material. To solve the problem, producers often blend those concentrates with purer material, creating even more demand – for the right kind of copper.

What’s next?

The ICSG has brought its prediction for a 595,000-tonne copper surplus in 2014 down to 393,000 tonnes on the back of higher apparent copper usage in China. Echoing that sentiment, the team at Thomson Reuters predicts that LME copper will average $6,500 per tonne for the fourth quarter, declining to $6,200 per tonne in 2015.

However, not all in the copper space are in agreement on that front: while Ioannou also does not see a copper deficit next year, he sees copper prices holding higher in comparison to GFMS predictions, and Andy Home has suggested that a deficit could come even sooner.

To be sure, copper investors will be keeping an eye out to see whether Home is right. Although the writer admits that his bullish thoughts “might seem premature,” he points out that others – including China’s SRB – appear to be looking at a tighter market, and that’s certainly worth taking note of.

China Home Price Slump Sends Iron Ore Plunging To 2009 Lows (-50% In 2014)

Iron Ore prices crashed below the critical $70/mt level overnight, lows not seen since the bottom in 2009, as China's home prices fell for the second month in a row, accelerating losses. Average property prices across China dropped 2.6% YoY in October (a bigger drop than September's 1.2% YoY slip) withonly 1 out of 70 cities seeing any positive price change (Zhengzhou +0.2% MoM). What is perhaps most entertaining is the 38.6% YoY rise in new home starts China just experienced - the biggest jump ever - as the first sign of demand (or hint from PBOC that they would 'help' with mortgages) and supply floods the market. The 'market' appears not to believe the hype.

China home prices continue to slide...

With 69 of 70 cities seeing falling prices...

Source: @M_McDonough

And that led to more weakness in Iron Ore (and copper) prices...

which is ironic because the Chinese homebuilders went crazy in October increasing new home starts by 38.6% YoY in October...!!

That will not end well.