Chinese Economy "A Lot Worse Than You Think," Bloomberg Says

Meanwhile, in China, things are “a lot worse than you think,” says Bloomberg metals analyst Kenneth Hoffman who recently visited the country to assess the outlook for metals demand. This doesn’t exactly come as a surprise. Falling demand from China has been a major factor in the collapse of iron ore prices which just today caused Australia’s fourth largest miner to suspend production altogether and which last month prompted Fortescue Chairman “Twiggy” Forrest to break out the old “let’s start a cartel” suggestion when discussing how to firm up prices. To let Bloomberg tell it, demand from China for the steelmaking ingredient won’t be picking up anytime soon:

China’s steel and metals markets, a barometer of the world’s second-biggest economy, are “a lot worse than you think,” according to a Bloomberg Intelligence analyst who just completed a tour of the country.

What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook.

“China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week traveling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”

Prices for commodities from iron ore to coal are sinking as China’s leadership tries to steer the economy away from debt-fueled property investment and smokestack industries, embracing services and domestic-led consumption. At the same time,

President Xi Jinping is stepping up efforts to combat pollution, further squeezing industry.

“There is a big fear this is going to get worse before it gets better,” Hoffman said in an interview. “It’s as bad as the data looks, if not worse.”

And the data doesn’t look so hot especially after last month’s contraction territory PMI print and collapsing rail freight number. Then there’s rising NPLs which are prompting the country’s largest banks to slash payouts as loans to manufacturers sour in the face of the very same economic transformation cited by Bloomberg. Finally, China has a small smog problem and while Beijing is apparently trying to export some of this to places that can use a little more pollution (like the rainforest), some estimates suggest that cleaning up the country’s air will come at the price of a 40% decline in industrial production.

Considering all of this, it’s no wonder that Credit Suisse is out with the following bearish commentary which supports a rather dire outlook going forward:

We have made fundamental changes to our demand analysis for iron ore. Given sharply weaker regional steel prices, we now assume a reduction in Chinese steel exports over the period to end-2018. Given a weak domestic backdrop for steel consumption, this results in steel production declines over the next three years. 

2016 is likely to be even tougher year than 2015 for prices as China steel production declines persist (forecast down 0.6%), Roy Hill mine comes to market, BHP adds 25Mtpa, and Rio Tinto continues its ramp up towards +350Mtpa output. In 2016, we expect the most marginal tonnes will have exited the previous year, so the reduction of China domestic tonnes and the retracement of "Other" seaborne tonnes will have slowed. Another period with aggressive pricing will be needed to clean out the new marginal tonnes. We forecast a price of $45/t CFR for the first two quarters next year.

Our China colleagues expect steel growth rates to be negative. Figure 10 shows how far China's domestic steel consumption has contracted from peak levels of 12 months ago. 

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Can you say "hard landing"?

World’s largest copper producer Chile slashes 2015 output forecast

Chile, the world’s largest copper producer and exporter, will mine this year less of the red metal than previously anticipated, with estimations dropping from 6.0 million to 5.94 million tonnes, the state copper commission Cochilco said.

While the recent floods weighted on the forecast changes, they were mostly triggered by a lower estimate from projects run by Anglo American and at the Zaldivar mine, operated by Barrick Gold

In its annual global trends report released Tuesday, the authority said that while the recent floods weighted on the forecast changes, they were mostly triggered by a lower estimate from projects run by Anglo American and at the Zaldivar mine, operated by Barrick Gold, El Mercurio reports (in Spanish).

"There is an effect, albeit of low significance, from operations temporarily halted (mostly Codelco's Salvador and JX Nippon's Caserones) due to the heavy rains," the commission noted.

In terms of prices, Cochilco said it sees the red metal averaging $2.85 a pound this year, losing a bit in 2016 to settle at $2.80.

Global copper production has been affected by several unforeseen events in the last few weeks. Before Chile’s torrential rains and floods workers in Indonesia blocked roads over a pay dispute, forcing the world’s second largest copper mine to halt production for five days.

London-listed Antofagasta Plc (LON:ANTO) had to slash its copper-output forecast for Los Pelambres copper mine, its biggest operation in Chile, by around 5,000 tonnes last month. The announcement was followed by a court decision to force the company destroy a giant dam it constructed for the same mine.

Meanwhile, BHP Billiton recently revised down its 2015 forecasts for output from Escondida, the world’s largest copper mine, due to decreasing ore quality.

Gold price hits 6-week high as hedge funds run for cover

Image by Saxo Bank

Large scale speculators in gold futures are scrambling to cover massive short positions – bets that prices will fall – as the price of gold continues to recover from near four-year lows hit last month.

On Monday gold for delivery in June – the most active futures contract – leaped $23.30 or nearly 2% from Thursday's closing price hitting $1,224.20 during lunchtime trade in New York before settling at $1,218.60, a six-week high.

Gold has now rallied some 6% from its 2015 low of $1,148.20 an ounce hit mid-March but is still well below highs above $1,300 reached in January.

Today's strength is on the back of disappointing economic data released on Friday when markets were closed when the US Labor Department reported that the world's largest economy added just 126,000 new jobs in March against expectations of a 245,000 gain and the smallest increase since December 2013.

The turnaround came after eight straight weeks of increasingly bearish positioning to levels last seen December 2013

The news strengthens the hands of Federal Reserve doves – including chair Janet Yellen – who believe any rise in interest rates should happen later rather than sooner so that the labour market could recover fully. The gold price and interest rates have a strong negative correlation. As the metal produces no income, the opportunity costs of holding gold rises in a high-yield environment.

After eight straight weeks of increasingly bearish positioning on the gold market to levels last seen December 2013, large investors like hedge funds or so-called "managed money" last week added 44% to net longs – bets that price will rise.

In the week to March 31 according to the Commodity Futures Trading Commission's weekly Commitment of Traders data, hedge funds slashed short positions by a fifth and at the same time added to long positions in gold.

Silver futures also trended stronger on Monday with May contracts jumping 1.5% to exchange hands at $17.60 an ounce at the close. Like gold, silver went off to the races at the start of the year to hit a 2015 high of $18.36 on January 22 before falling back.

Silver positioning also turned bullish last week with speculators reducing short positions by 25% and adding to longs for a net long position of nearly 150 million ounces.

Like the price of silver, speculation in silver futures tend to be volatile. Hedge funds had to cover a net short position of 53 million ounces in October last year after pushing longs to a record of 234 million ounces only three months earlier.

Sourced :- Frik Els of MINING.com

Copper futures surge 3% on hopes of delayed U.S. rate hike

Copper prices surged on Monday, as weaker than expected U.S. employment data forced investors to recalibrate their assumptions about the future course of the Federal Reserve's monetary policy.

On the Comex division of the New York Mercantile Exchange, copper for May delivery rallied 7.6 cents, or 2.79%, to trade at $2.810 a pound during European morning hours. Prices touched an intraday peak of $2.830, the strongest level since March 26.

Futures were likely to find support at $2.709, the low from April 1, and resistance at $2.868, the high from March 26.

There was no settlement in copper futures on Friday as markets were closed for the start of the Easter holiday. Trading activity is expected to remain light on Monday, with markets in Europe, the U.K., China and Australia all closed for holidays.

The Labor Department reported Friday that the U.S. economy added 126,000 new jobs in March, the smallest increase since December 2013. Economists had forecast jobs growth of 245,000 last month.

The surprisingly weak report added to concerns over the outlook for economic growth after other recent economic data pointed to a slowdown at the start of the year.

A slowing labor market could prompt the Federal Reserve to reconsider a planned increase in interest rates. Last month the Fed indicated that the first rate increase could come as soon as June, but added that continued improvement in labor markets would be a key factor it would consider.

Later in the day, the U.S. Institute of Supply Management is to release data on service sector activity as investors look for further indications on the strength of the economy and the future path of monetary policy.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, traded at 96.87, not far from a seven-day trough of 96.55 hit on Friday.

Elsewhere on the Comex, gold futures for June delivery rallied $20.50, or 1.71%, to trade at $1,221.40 a troy ounce, while silver futures for May delivery soared 50.7 cents, or 3.04% to trade at $17.20 an ounce.

A delay in raising interest rates would be seen as bullish for gold, as it decreases the relative cost of holding on to the metal, which doesn't offer investors any similar guaranteed payout.

What Direction Will Nickel Go ?

Nickel futures prices surged after profit-taking by shorts. SHFE 1507 nickel rallied up by 3.54% to close at 96,160 yuan per tonne, and LME, as of 15:07 Beijing time, traded at $12,920 per tonne, up 1.69%. 

Any further room will be allowed for nickel prices to go up, or nickel prices will track lower again? 

“SHFE nickel will follow the trend in LME nickel market after just being launched, and will get boosted from a rally in SHFE copper in the short term,” an analyst from COFCO Futures told SMM in an interview. 

The long-term outlook is also not bad, the analyst added. 

“I expects nickel prices to keep falling in the coming months, with next key support level around $11,400 per tonne”, Commerzbank’s analyst said. 

“Investors should be very careful of recent price movements, and supply in China’s domestic spot market now remains sufficient, and the round of gains is just price corrections after earlier losses,” an analyst from Guosen Futures said. 

Will Copper Prices Rally in Q2 on Favorable Policies and Arrival of Peak Season

Copper prices extended gains in March helped by stimulus measures rolled out by Chinese government. Prices on Shanghai Futures Exchange registered a 1.98% growth and three-month copper on London Metal Exchange climbed 1.7%.

Will copper consumption pick up significantly in the second quarter – a peak demand season? Are copper prices set for further gains in April?

A majority of futures analysts interviewed by SMM are optimistic about copper prices in this month.

“Output of Chinese copper smelters remains limited, and the low SHFE/LME copper price ratio will leave fewer opportunities for copper importation, so we expect no large oversupply pressure in copper market this month,” analyst from Ever bright Futures said, “besides, the favourable macro conditions will help restore market confidence.”

Analyst from Galaxy Futures agreed with the opinion and told SMM that more pro-growth measures from China and a potential delay of the Fed’s interest rate may lend support to copper prices. In addition, operations at world’s large copper mines have frequently been disrupted lately, leading market to expect real copper supply to fall short of forecast.

“That plus the improving consumption in April, means copper prices will grow further this month, and we expect LME copper to hit $6,600 per tonne and SHFE copper to climb to 46,000 Yuan,” the analyst said.

An analyst from Western Futures added that China’s accelerating investment in infrastructure projects will contribute to stronger copper demand as well, in turn boosting copper prices.

Several analysts, however, are more cautious.

An analyst from Baocheng Futures expressed concerns over China’s growth and a slower recovery in copper consumption.

“Demand for finance-driven copper is still weak,” the analyst explained. “Furthermore, although China set high goals for power investment this year, whether the plan will be materialized remains unknown, and this will add to uncertainty over real copper consumption in power sector.”

Another analyst worried that the continuous growth in copper inventories may block the increase in copper prices.

LME Aluminium price to average $1,840 per mt in 2015: Natixis

The French Bank Natixis in its latest research report forecasts LME Aluminium price to average around $1,840 per mt in 2015. The prices are likely to move higher in 2016 to average around $2,000 per mt.

In its metals review for H1 2015, Natixis forecasts a tug of war between positive and negative factors in aluminium market over the next few years. The bank indicates several positive factors that may favor the aluminium market.

The biggest bullish factor for aluminium is the expected robust demand growth from automotive sector. Also, any shortage of bauxite mat lead to rise in alumina prices. In addition, limited excess supply from China may augur well for the commodity prices in the years to come.

On the other hand, Natixis forecasts excess aluminium inventories to stay at least until 2018, which may lead to further fall in premiums. Also, strengthening dollar may turn out to be a negative factor for aluminium along with other commodities in general.

Natixis also points out a number of upside and downside situations that may have bearing on the above price forecast.

In an upside scenario, acute shortage of bauxite may further tighten alumina supplies. Intervention by Chinese authorities on export rules and adjustment of VAT refunds may limit exports of semi-processed aluminium products out of China. The idling of loss making aluminium smelters across various provinces may limit excess supply. In such a scenario, the aluminium prices may average around $2,000 per mt in 2015 and increase further in 2016 to average around $2,250 per mt in 2016.

A sharp fall in aluminium premiums could make more metal available. Boost in low-cost aluminium production by China and increased Russian output on account of weak ruble may result in more available in the international market. In such a scenario, the average prices are likely to fall to $1,700 per mt in 2015 and 2016, the bank said.