This is what a broad-based metals and mining rally looks like

Gold may be grabbing the headlines with its best year-to-date performance in decades and silver's 48% surge in 2016 to above $20 an ounce is a big swing even for such a volatile metal, but this year's rally in commodities is broad-based and becoming more so.

After under performing gold in 2016, platinum has now overtaken the yellow metal with a year to date advance of a shade under 34%. A  chunk of those gains came in July, the metal's best monthly performance since 2012. Sister metal palladium has also enjoyed its best month for nearly a decade, soaring 21.1% in July. With a 52% or $250 an ounce gain from trough to peak in 2016, palladium is now even besting silver.

Thermal coal is probably the biggest upset – seaborne prices are up 22% in 2016 to above $60 a tonne with most of those gains coming in recent weeks

Base metals have also enjoyed a breakout 2016 with across the board gains year-to-date. Measured from recent lows which mostly occurred at the end of 2015 and in January and February this year the recovery in prices this year is even more impressive.

One of the few decliners until recently, lead is still a laggard but now boasts a 2.7% rise in 2016 scaling $1,800 a tonne in July. Bellwether copper has also been lack luster adding only 3.3% in 2016 as it remains stuck below $5,000 a tonne, but elsewhere in the complex prices are in rapid advance.

Aluminum and cobalt, both up 9.4% so far this year haven't enjoyed the spectacular gains of the likes of likes of zinc (+40% to $2,275 a tonne) and tin (+24% just short of $18,000), but like nickel (+24%) which regained the $10,000 a tonne level in May, the metals could play catch up over the remainder of the year as Chinese demand picks up steam.

Steel making raw materials iron ore (+41% to top $60 a tonne on Monday) and coking coal (+29% and back in triple digits) have also come back strongly despite all predictions. Thermal coal is probably the biggest upset – seaborne prices are up 22% in 2016 to above $60 a tonne with most of those gains coming in recent weeks as a domestic clampdown by Beijing opens up opportunities for exporters.

Oil dipped below $40 a barrel today as the 2016 rally comes off the boil, but the commodity is still up more than 50% from its February low. Potash at levels not seen since 2007 and uranium languishing around $25 with few signs of improvement appear to be the exceptions that prove the rule for mined commodities this year.

Source: Steel Index, LME, Comex, Nymex, UX, Infomine. Prices at August 1, 2016

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Commodity prices set for significant rebound in 2016: Scotiabank

While commodity prices fell 0.3% in February and 25% year-over-year, the second half of the month saw the beginning of a price rally that is expected to continue throughout 2016, according to Scotiabank’s commodity price index released March 29.

As China’s economy has become less of a concern and the U.S. dollar has grown weaker, the outlook for commodity prices has improved. In March, prices are expected to see a “significant” rally, according to the index, from a decade low.

“Equally important, hedge and investment funds appear to be looking for reasons to bid commodity prices higher, after the rout of recent years,” said Scotiabank’s vice-president of economics and commodity market specialist Patricia Mohr.

“2016 should be a transition year for commodity prices, with the current slowdown in global capital spending in oil and gas and mining setting the stage for a strong rebound going into the next decade.”

The 0.3% dip was driven by a 7.4% decrease in the oil and gas index, which has fallen almost 50% year-over-year. West Texas Intermediate (WTI) hit a low February 11, reaching US$26.21. This is down from a high of $147.90 in July 2008, which was right before the price plummeted and hit as low as $32 that same year.

As of March 28, WTI was priced at US$39.39 per barrel, an increase of 50% over the price recorded six weeks prior.

The recent rally relates to the increasing likelihood of a production freeze between OPEC and Russia, which will be the subject of an April 17 meeting in Doha.

“While cuts are not in the cards and Iran will not participate, a ‘freezing’ of production—particularly by Saudi Arabia and Iraq—will contribute to a gradual rebalancing of world supply with demand by late 2016 or early 2017,” Scotiabank said in its report.

“Pipeline sabotage and outages in northern Iraq and Nigeria contributed to firmer prices in February.”

The metal and mineral index grew 1.4% in February, and March is expected to see another increase. One reason for the rally is the rebound in prices for some metals, as demand is increasing above supply. Zinc prices are expected to strengthen as demand grows 3.6% this year due to increasing auto sales and production, construction in Europe and infrastructure spending in China and India. Iron prices have also jumped in advance of China’s peak construction period in April and May.

Industrial Metals: Bull Market or Dead Cat Bounce?

After a disastrous year in 2015, industrial metals started off on the right foot in 2016. Indeed, every single base metal is up in price on the year-to-date.

But, is this price rally just another dead cat bounce or the start of new bull market? and, what factors do we need to watch for more clues?

Sharp Rallies Are Usual in Bear Markets

Since the commodity bear market started in the spring of 2011, we’ve had several price rallies in industrial metals (see the graph above), that made some people think that a new bull market was underway. It wasn’t. Sharp price rallies are not unusual in bear markets and, although base metals are showing strength, we need more evidence before confirming that this won’t be another bounce followed by further declines like we’ve seen before.

Crude Oil and Base Metals Move Simultaneously

The main driver causing metal prices to rally this quarter is the oil price recovery that’s been happening since February. Lower fuel prices have compounded the longest commodity slump in a generation as oil is also key input in the cost of producing industrial commodities.

Moreover, oil is an asset closely followed by commodity investors. Falling oil prices make investors move away from commodities and, of course, industrial metals. Finally, the latest recovery in oil prices has caused oil-exporting countries such as Russia and Canada to strengthen their currencies against the US dollar. Therefore, higher oil prices contributed to a weaker dollar these past few weeks as we’ll explain soon.

As we just reported in our latest MMI, Saudi Arabia and other powerful OPEC members are reportedly discussing how to boost oil prices to $50 per barrel. Despite reports of a Russia and Saudi Arabia-approved production freeze, however, other non-OPEC nations such as Iraq still have not committed to cutting their own oil production. New production from Iran has entered the market at a much lower pace than most expected, but there is also good reason to believe Iran will ramp up production gradually as it deals with the nuances of re-entering global oil trading.

Similarly to what we see in base metals, it’s not possible to know if this oil price rally is sustainable or not. What is true is that we’ve seen oil prices bouncing in previous years, only to then see them slump so we need more evidence to believe oil prices will continue to rise. What oil prices do from now will have a huge impacts on metal prices.

Did the US Dollar Bull Market Just End?

Base metals as commodities move in opposite directions to the dollar. In Q4 of 2015, a rising US dollar contributed to the slump in base metals. However, some factors have made the dollar weaken this quarter, helping push metal prices up.

As explained above, a recovery in oil prices contributed to a weaker dollar this quarter. Also, the Euro is gaining against the dollar after the European Central Bank recently announced that it probably won’t lower interest rates more.

The dollar index (shows the performance of the dollar against a basket of currencies) has traded within main support and resistance levels (red lines in chart above) for over a year. The dollar might be topping, but it’s to early to say that. We would to see if the index breaks below support levels to call for the end of the dollar’s bull market. If that happened, we would be more inclined to call a sustainable rebound in metal prices.

China: No Signs of Rebound

Another big factor that affects the price performance of industrial metals is China. For a sustainable rally in industrial metals we’d like to see a recovery in China, but we haven’t seen that yet. That could change but, so far, it makes the rally in base metal prices a bit suspicious. Investors’ sentiment on China hasn’t become bullish yet, at least we see that reflected in the performance of China’s stock market, which is hovering near the lows recorded in January.

Fundamentally we don’t see signs of a turnaround, either. Indeed, if anything fundamentals are signaling more choppiness ahead. Recently, China reported a large drop in exports since the beginning of the financial crisis, with February exports down 25% year over year, confirming weak global demand which will likely be a drag on China’s economic growth in 2016. Even more worrisome for commodities might be the slump in imports. China’s imports in February fell to the lowest levels in six years, confirming weak demand in China.

Is it Now a Good Time to Buy Forward?

Well, that depends on what type of buyer you are. If you are a bottom picker then you are probably tempted to buy large quantities at these low prices. However, picking bottoms is easier said than done and it’s hardly ever a good strategy.

Source:MetalMiner

Zinc seen as best metal pick

Supply cuts by major global producers and bright demand prospects support the bullish trend

Global markets were battered brutally in January, the worst since the financial crisis in 2008.

Circuit breaker mechanism, which was introduced in January to cushion the Chinese equity markets from excessive volatility, ironically spurred panic and hurt global market sentiments. Amidst such gloom, the only metal which stood the test of time was zinc, thanks to the supply tightening measures by major producers.

Mines closure

Australia’s giant Century mine and Ireland’s Lisheen mine ultimately called it off earlier this year after proposing output cuts in 2014. Mining company MMG exported its final shipment of zinc concentrate from Karumba, marking the end of production at Century Mine, one of the world’s largest zinc and lead deposits.

Another major support came from Switzerland-based mining and trading giant Glencore’s decision to mothball around 500,000 tonnes per year of mining capacity, mostly in Australia and Peru, apart from Europe’s biggest zinc producer Nyrstar’s suspension of its 50,000-tonne-per-year Middle Tennessee mines.

This is in addition to Glencore’s announcement in October 2015 that it will cut 500,000 tonnes of annual zinc production, equivalent to around four per cent of global supply.

Furthermore, Horsehead Holding Corp, a large US zinc producer, which has been operating for around 150 years, filed for Chapter 11 bankruptcy on February 2, hurt by slump in metals prices and a shortage of cash.

Owing to such aggressive supply reductions, Treatment Charges (TCs) or fees paid by miners to smelters to process raw material into metal has tumbled to around $125 a tonne from $220 a few months ago.

Higher imports

The closure of major zinc mines has reduced supply, resulting in lower treatment fees charged by smelters.

This shows that the concentrate is not as readily available as last year but imports show a positive trend as steel mills gear up for the Chinese production of galvanised steel products.

Recent data released by the General Administration of Customs showed refined imports of zinc soared by 150 per cent in January.

Zinc imports surged by 440 per cent in December 2015 after shipments nearly quadrupled in November and almost tripled in October. Taking tightening measures into consideration, Mitsui Mining & Smelting Co., Japan’s top zinc supplier, stated that zinc market balance is likely to shift to deficit of 440,000 tonnes, the most in more than a decade and prices likely to surge by about a third in 2016.

Strong demand

Along with supply constraints, demand prospects too brightened as Chinese car sales were up 9 per cent year-on-year in January after rising 13.4 per cent in the fourth quarter of 2015 from the corresponding period of last year. Global automotive market is a large component of demand for zinc and numbers show the industry remains robust.

Overall, output cuts and anticipation of higher deficit in 2016 place the grayish white metal in a win-win situation.

Hence, we expect zinc prices to trend higher from a two-month perspective and LME zinc (CMP: $1,808) prices can possibly head higher towards $2,000/tonne while MCX zinc (CMP: ₹121.35) prices may surge towards ₹140/kg as rupee depreciation towards 70-mark will also be a supporting factor.

hindubusinessline