Copper markets sanguine as Chinese manufacturing slumps to 8 month low

More evidence of slowing demand from China emerged this morning with manufacturing activity dropping to an 8 month low. The HSBC/ Markit flash purchasing managers index (PMI) fell to 48.1 in Mar, down from 48.5 in Feb and against expectations of a bounce in activity to 48.7. Copper futures initially fell on the news before recovery to around $6,490 per tonne on hopes that the recent flurry of bad data from China would spur the authorities into action and introduce further stimulus measures.

However, Bloomberg reports comments from Finance Minister Lou Jiwei suggesting China will focus on quality of growth this year, which means no shotgun stimulus program. Lou added that China will pay more attention to the environment and won’t use  large-scale fiscal stimulus to spur investment in order to reduce overcapacity. Although the Chinese authorities have set a 7.5% growth target for 2014, China’s premier has alluded to a level of flexibility – research from China’s National Development and Reform Commission sees growth at 7% in 2014. read more

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Weather and China key drivers of commodity prices in 2014

Commodity price gains have generally been led by crops with weather concerns supporting prices. Drought in Brazil raising concerns that this and next years harvest will be damaged. The most surprising bar on this chart is natural gas since the so called ‘polar vortex’ over the US resulted in a surge in demand for heating while the extreme cold prevented rigs from responding. Natural gas prices peaked in mid-February at over $6 per mBtu (at the time up over 50% during 2014) but since then warmer weather has caused prices to fall, giving up virtually all its gains since the start of the year. The weakest commodity prices have been industrial metals where signs of a slow down in China coupled with concerns about commodity financing deals has reduced demand for the metals. The exception has been nickel where the introduction of an ore export ban by key supplier Indonesia means Chinese buyers are now running down their stocks and searching for alternative suppliers. read more

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Chart: Libyan oil output falls to post war low

Libyan oil output fell to a post-war low of 210,000 b/d in November, according to the latest Bloomberg estimates as armed protesters disrupt efforts by the oil industry to resume production.

Meanwhile after the Libyan army threatened to use force against armed protesters, the country’s Oil Minister told reporters at an OPEC meeting that he was “optimistic” that pressure on protesters to allow the resumption of production would see Libyan oil output restored to 1.5 million barrels per day (bpd). Then suggesting that all its oil ports would reopen by 10th December the minister estimated that full oil production would resume about a week later. read more

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Charts: Seasonal price trends in steel and base metals

If you are in the market to buy aluminium, copper, nickel or zinc expect to pay more between now and May. That is the message from seasonal price trends over the past 60 years (h/t @CasperBurgering from ABN AMRO). Demand for base metals tends to increase during the period Nov-Mar as construction output ramps up and new cars are generally purchased.

Seasonal base metal price trends

The price trend is also seen to a lesser extent in steel prices and in its key constituents coking coal and iron ore (According to industry estimates about 770 kg of coking coal and 1,400 kg of high-grade ore are required to produce 1 tonne of steel). China’s steel industry is seasonal with the most active production occurring in May-Aug each year. Production rates tend to decline from Sept- Nov, reducing the need for iron ore and coking coal before restocking begins ahead of the next rise in production. read more

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Chart: coal price slump near end on output cuts

Coal prices have fallen by 6% since the start of 2013 and are down by 35% over the past two years. According to Bloomberg, 2014 forward prices are also trading near $90 per tonne. If prices continue to trade at this level many coal miners from as far away as Russia, US or Australia would be selling coal at a loss.

Prices are unlikely to go much lower. According to Deutsche Bank, higher US natural gas prices mean US exports of coal are likely to fall to 35Mt in 2013, down from 46Mt in 2012. Meanwhile, coal mines in Poland and Russia (some of the higher cost producers) are expected to pencil in output cuts this year. read more

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