LME-Comex copper spreads both tightening, but. Daily. Global Commodities. 24 February 2014

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1 Daily LME-Comex copper spreads both tightening, but Both the LME and Comex copper nearby forward curves are in backwardation. In both cases, the tightness is due in part to depleted inventory levels, and, in both cases, the backwardation could be much wider, given current stock levels. We noted last week (Commodities Daily 19 February) that the nearby LME spreads were behaving in line with historical norms, given on-warrant stock levels. However, the interesting aspect from a Comex spread perspective is that, given the concentrated nature of LME copper inventory in the US, and the respective backwardations on the two markets, will the natural ebb and flow between the two markets help to limit the Comex backwardation? Generally speaking, the Comex nearby spreads tend to mirror changes in the nearby LME copper curve. From time to time, this is exacerbated by stock movements, as appears to be the case with the current backwardation. An obvious safety mechanism would be the flow of metal (where eligible) from LME to Comex sheds. With LME copper warrants in New Orleans accounting for 99.2% of the total 163,425 mt of copper in US LME warehouses, and with 55,100 mt of that material sitting in the cancelled warrant category, that natural flow of material is a little disjointed. As a consequence, and given our view of the protracted nature of the LME backwardation, the Comex tightness may persist, and even worsen over the coming weeks. Comex 1m-3m spread vs inventory Comex on-wrnt Source: COMEX, Standard Bank Research Last LME inventory by region Source: LME By Leon Westgate 0 Jan-10 Jan-12 Jan-14 US on-wrnt Asia on-wrnt Euro on-wrnt US cnx-wrnt Asia cnx-wrnt Euro cnx-wrnt Commodities Strategist Walter de Wet Walter.DeWet@standardbank.co.za Commodities Strategist Leon Westgate Leon.Westgate@standardbank.com Commodities Strategist Melinda Moore Melinda.Moore@standardbank.com This material is "non-independent research". Non-independent research is a "marketing communication" as defined in the UK FCA Handbook. It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

2 Base metals The base metals came under heavy selling pressure overnight following newswire reports that some Chinese banks had curbed real-estate lending and that the rate of house price growth in some Chinese cities had slowed. Decent turnover has emerged in aluminium and copper, with the price weakness sparking good two-way interest. The lending news isn t particularly new, with Industrial Bank Co., the only named financial institution in the reports, having said that they would curb lending prior to the Chinese New Year. The news, particularly when combined with fears over the health of Chinese house builders, has nevertheless spooked the market. Copper has dipped below $7,050 after falling heavily overnight and failing to mount a recovery. A sell-off on the SHFE triggered the weakness in the LME price, while a 10% increase in SHFE OI suggests that large new short positions were added overnight. Freeport is still in talks with the Indonesian government over exports of concentrates, while it is also awaiting the feasibility study for a 300 ktpy copper smelter built in conjunction with PT Aneka Tambang which should be available in April. Kazakhmys meanwhile moved to clear up concerns that production would be cut following the shutdown of one of its Zhezkazgan smelter late last year. The company will produce the same amount for copper; however, the mix will change with the company selling more concentrate rather than refined metal. Copper in concentrate sales will account for around 40% of copper units sold this year, compared to 11% in Last year, Kazakhmys produced 294 kt of copper (in both concentrate and metal form). Precious metals By Leon Westgate The latest CFTC data confirms what we noticed in open interest for precious metals last week; there has been large-scale short-covering in the futures market, especially silver. Silver net speculative length as a percentage of open interest increased from 6.8% to 13.6% during the week ended 18 February, almost entirely due to short-covering. The current speculative length in the futures market is now closer to the 5-year average (which is at 16.7% of open interest), and well above the 1-year average of 7.2% of open interest. Tactically, we still prefer approaching silver from the short side, based on what we insist are weak fundamentals. However, given the strong support that the metal has received in the $ $19.00 range, shorting the metal in that range holds little value from a risk/return perspective. We expect rallies to fade, and foresee further downside if support at $18.50 is broken. Resistance is at $22.00 and $ The dollar is much weaker against the euro this morning, heading towards the level again. Gold is finding support in the greenback s weakness. As pointed out on Friday, in Asia demand for gold is still muted. We believe that Asia physical demand must be brisk to move gold higher on a sustainable basis. The SGE premium dropped as low as $0.75/oz on Friday a level not seen for some time. However, with gold above $1,330, the metal looks bullish again. It needs to drop below $1,300 before we would expect more selling to come through and new shorts to enter the market. In South Africa, the platinum mine strikes continue. There is no resolution in sight. We believe that SA producers may have around 3 months worth of platinum inventory stockpiled in London and Zurich. We therefore use 3 months as benchmark for the possible impact of these strikes on prices. The closer we get to the 3-month mark, the greater price support may become. The platinum strike has now entered its 5 th week. By Walter de Wet 2

3 Bulks Chinese steel markets have been hit by the negative news that property sector & associated lending (mezzanine financing) is being curtailed until the end of March by Industrial Bank, due to balance sheet uncertainties, following a significant drop in recent transaction prices, with discounts of up to 20% below list prices in certain key cities (eg Hangzhou off 20% and Changzhou off 40%), with panic that several other cities will follow suit due to oversupply. This comes despite official NBS news that home prices in across China are still increasing (eg Shanghai up 17.5% and Beijing up 15% y/y) with rises across the 70 cities surveyed up 9.6% y/y, versus 9.9% in December. Lenders are already being impacted by higher borrowing costs, with any further lending restrictions likely to further drive up costs if other banks join in this curtailment. In addition, developers are suggesting that sales in January were actually up 14% y/y. While China Securities News reported over the weekend that several (smaller) banks (including Bank of Communications; China Merchant Bank; China Ag Bank and China CITIC) are all halting lending, only Industrial Bank has made any official announcement thus far confirming its actions, with others issuing denials. Meanwhile, it turns out Industrial Bank actually announced its decision prior to the CNY holidays. Potentially, the entire market has reacted to mystery & innuendo, more than reality. We will probably know more tomorrow In the meantime, Shanghai Equities fell 1.75% to 2077 points today, with the property developers index off 5.4% and banks off too, on the back of developer non-performing loan concerns. Shanghai 7-day interbank spot rates closed at 3.27%, leaving further room for the PBOC to suck out more liquidity tomorrow, should they choose. Its hard to punt against them; however, all the negative news over the past few days may lead them to think twice this week, at least until February s official PMI manufacturing results are released on Saturday. Meanwhile, China s finance minister said on Saturday that China s growth was well supported to hit 7-8% this year. Shanghai Rebar Futures May-14 contract closed off RMB 63/t at RMB 3,326/t, the lowest price since Sept 12, reacting to China s negative macro property sector lending and pricing news, having already been hit last week by poor PMI numbers and rising crude steel supplies, in the face of relatively high inventories. Dazong HRC April-14 futures shifted RMB 42/t lower to RMB 3,413/t, reacting to the same trends. Among physical steels, Tangshan billet prices fell RMB 10/t to RMB 2,890/t. Rebar prices fell RMB 10-20/t in Shanghai and Beijing markets today, with some construction projects re-starting in the north as temperatures climb back above zero. HRC prices fell RMB 10-20/t in Shanghai and Beijing. Hebei I&S rolled over its HRC prices for March, highlighting the flat nature of market conditions in what is traditionally a restocking period. Tangshan region steel re-rollers and steel makers in Fengrun district were asked to halt output during 8am-8pm or make production cuts (of 30%) from yesterday, until the region s heavy air pollution has lifted, amounting to c.8mtpa impacted of a 800mt market. Cement makers are also impacted, requested to stop work from 8am til 4pm each day. Dalian Commodity Exchange IO active May-14 contract prices fell RMB 30/t to RMB 821/t. Iron ore port stocks are at 107.9mt, up 1.1mt w/w, with outflows improving post-cny dislocations. Meanwhile both Australian and Brazilian load rates are improving, up 1.8mt w/w, given a lack of port maintenance & weather disruptions. 3

4 Among physical iron ore, Vale sold a Carajas Fe 64.22% (Si 3.57%; 1.49% Al) cargo at $127/t, compared to $131.01/t last Thursday, confirming the negative mood in the market. Meanwhile globalore was showing a bid of only $118/t against a RioT PB fines offer of $122.50/t. The TSI Fe 62% China CFR price index fell $2.50 to $119.90/t (MTD: $122.15/t). The Platts Fe 62% index fell $3/t to $119/t, while the TSI Fe 58% index fell 20 cents to $110.80/t (MTD: $111.81/t). The Metal Bulletin Fe 62% index fell $1.53/t to $120.61/t, while its Fe 58% index fell $1.63/t to $105.66/t. Argus Fe 62% fell $2.20/t to $118.20/t. Mysteel s Fe 62% index fell $3/t to $119.25/t, while its Fe 58% index fell $3/t to $107.25/t. In IO supply news, Goa s next auction will be conducted on 5 March, covering 1.55mt. Gerdau is expecting to add 6.5mt of IO by end-2016, with $400m+ to be spent in The Baltic Exchange Cape index shifted up 1.1% to $10,253/day, with C3 at $18.92/t and C5 at $8.35/t. Germany s IFO survey came in above consensus at (vs 110.5). Indonesia s GDP may slow this year to 5.5%, due to rate tightening, as the country reins in its current account deficit to a 2.5% of GDP target, with elections due this year. South Africa s GDP growth is due out tomorrow, with Q4:13 expected at 2.1%, up from 1.8% in Q3, driven by improved manufacturing, mining and retail spending. For Q2:14 thermal coal prices, API 2 is trading at $ 73.60/t; API 4 is trading at $ 73.15/t; while Newcastle is trading at $77/t, all off from Friday s close. The Pacific is reacting to negative China news, while the Atlantic is reacting to the same weak Euro trading and positive weather conditions. Newcastle front-end, however, is being held up on the back of April contract year price negotiations, as well as the threat of Hunter Valley Rail workers striking from tomorrow, for 48 hours. Newcastle exports fell last week, by as much as 26.6% w/w. SGX traded 810,000 tonnes of thermal coal derivatives in January, up 4 times y/y, with Indo Sub-bit at 570kt. API 5 has traded for the first time today, with Q2:14 kicking off in the range of $ /t. API 8 priced at $76.76, off only 10cents, with NAR 5500 CFR bids in the low to mid 76 range. Zhengzhou Futures May-14 contract price fell RMB 4/t to RMB 528.4/t, hurt by the overall negative sentiment pervading the property sector, with sectors servicing the sector (including steel) to be impacted by any slowing, hurting industrial energy demand. China s coal rail deliveries rose 5% y/y in January to 215mt. Premium Hard Coking Coal spot prices are trading in the $ /t Qld FOB range, with China CFR prices ranging $ /t. On the Dalian Exchange, May-14 coke price traded off RMB 51/t to RMB 1,277/t, while HCC prices closed RMB 906/t, off RMB 26/t. Chinese coal port stocks reached 12.27mt, up 0.2% w/w. By Melinda Moore 4

5 Commodity Prices Base Metals LME 3 month Open Close High Low Daily Change (%) Cash Settle Change in Cash - 3m change cash settle Aluminium Copper Lead Nickel Tin Zinc Daily LME Stock Change (mt) Metal Today Yesterday In Out One day change YTD change (mt) Cancelled warrants (mt) Cancelled warrants (%) Contract turnover Aluminium Copper Lead Nickel Tin Zinc Shanghai 3-month Open Last 1d Change COMEX Open Close Change Change (%) Aluminium Ali Feb' Copper Cu Feb' Zinc ZAR metal prices Aluminium Copper Lead Nickel Tin Zinc ZAR/USD fix Cash month Precious metals AM Fix PM Fix High bid Low offer Closing bid Daily EFP's change Gold /-0.5 Silver /0 Platinum /+3.5 Palladium /+1.0 Forwards (%) 1 month 2 months 3 months 6 months 12 months Gold Silver USD Libor Technical Indicators 30-day RSI 10-day MA 20-day MA 100-day 200-day Support Resistance MA MA Gold Silver Platinum Palladium Active Month Future COMEX COMEX SLV NYMEX NYMEX DGCX GLD TOCOM CBOT GLD GLD PAL PLAT GLD Settlement Open Interest Change in Open Interest Energy Energy futures pricing 1 month Change 2 month Change 3 month Change 6 month Change Sing Gasoil ($/bbbl) Gasoil 0.1% Rdam ($/mt) NWE CIF jet ($/mt) Singapore Kero ($/bbl) % Rdam barges ($/mt) % Fuel Oil FOB ($/mt) Sing FO180 Cargo ($/mt) Thermal coal Q2 14 Change Q3 14 Change Q4 14 Change Cal 15 Change API2 (CIF ARA) API4 (FOB RBCT) Source: LME, NYMEX, COMEX, SHFE, Standard Bank Research 5

6 Commodity Prices Latest Price 1-week 1-month 3-month 6-month 1-year Bulks Steel Physical Turkish Scrap 80:20 (Iskinderun CFR) $/t % 1.96% 10.61% 10.86% -0.80% China Tangshan Steel Billet $/t % -0.20% 1.43% -0.60% -7.81% China HRC export (Shanghai FOB) $/t % 0.19% 0.57% 6.18% -6.16% North Europe HRC domestic (ex-works) $/t % 0.00% -1.71% -1.71% -8.51% North America HRC domestic (Midwest FOB) $/t % 0.15% 6.21% 8.06% 8.40% Steel Futures LME Billet Cash $/t % 23.53% 50.00% % 7.51% LME Billet Futures (1-mth) $/t % 23.53% 48.58% % 6.78% LME Steel Billet Stocks change Shanghai Rebar Futures (Active contract) $/t % -7.66% -4.07% 3.15% % Shanghai Rebar Futures On-Warrant Stocks change SHFE Rebar - Open Interest SHFE Rebar - Total Volume China Steel Inventory (million tonnes) % 0.39% % % 1.55% Iron ore China Iron Ore Fines (62% Fe; CFR Tianjin) $/t % -5.67% -0.23% 6.31% % China Iron Ore Fines (58% Fe; CFR Tianjin) $/t % -3.02% -0.33% 6.82% % SGX AsiaClear IO Swaps 62% Fe $/t (1-mth) % -5.31% 0.88% 7.58% % Platinum China Iron Ore Inventory (million tonnes) % 0.73% 16.30% 12.62% 11.69% Coking coal Premium Hard Coking Coal (Qld FOB) $/t % -1.70% -9.02% -4.39% % Capesize freight Saldanha South Africa-Beilun China % % % 31.48% 42.00% Financials pricing RMB Currency % -0.29% -1.06% -1.22% -2.75% China 7-day repo % % % 11.67% 34.45% API2 (CIF ARA) % -9.26% -8.18% 3.33% % Source: LME, SGX, McCloskey, SHFE, Bloomberg 6

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