Macquarie Research, Commodities - Weaker stainless in the short run

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Commodities Comment
Weaker stainless in the short run
Feature article
 Finnish stainless steel producer Outokumpu has warned of a short-term
deterioration in the stainless steel outlook. We review the reasons why.

Latest news
 LME base metals prices posted a mixed performance in trading on Tuesday.
Aluminium advanced by 0.9% while zinc slipped back by 1.2%, following the
delivery of over 70,000t of metal into LME warehouses in the last two days,
to fall further adrift of its sister metal, lead, which rose by 0.6%. The copper
price also fell on the day but not before posting a new intra-day record of
$4.20/lb. Precious metals prices were also mixed, with silver up by 1.9% to
almost $30/t.oz but gold posting a small fall.

 US retail sales increased by 0.8% in November and optimism among small
businesses rose to a three-year high, suggesting economic recovery may be
gaining momentum supported by consumer spending.

 As mentioned, LME zinc stocks have risen sharply in the last two reporting
days with a net increase of 43,475t on Monday (the largest daily rise in since
June 2005), following an increase of 25,650t last Friday, to leave stocks over
a seven-year high of almost 700,000t. Almost all of this metal has arrived into
New Orleans and we think that it represents the repositioning of inventories
within the industry by leading suppliers / traders, probably encouraged by the
front prompt tightness of recent weeks, rather than any significant change in
the current fundamental supply-demand balance in the physical market.
Indeed, recent reports of some settlements of annual contract premiums for
2011 indicate that end-users continue to experience to some physical tightness
in certain regional markets, although we would not be surprised to see further
increases in LME zinc stocks in the short term. International trade data suggest
more zinc metal may be on hand for delivery into LME warehouses in the US.

 Building work has begun at the Perkoa zinc mine project in Burkina Faso,
which is a joint venture between Glencore (50.1%) and Blackthorn Resources
(39.9%), with the government holding the remaining 10% share. The first ore
should be mined in 1H 2011 and we expect output to ramp up progressively to
over 100,000t of zinc-in-concentrate by 2013-2014.

 Latest data from SXcoal show that power plant coal inventories in China have
fallen to 16 days of consumption, down from 21 days at the end of October.
With inclement weather causing over 60 hours of downtime at Bohai Bay
ports since 1st December, coastal freight shipments have been adversely
affected and power plants in southeastern China are down to 13 days of
consumption in stock. This is likely to support firm domestic spot prices for
thermal coal in the coming weeks.

 Gladstone Ports has stated that coal deliveries to the Queensland port have
been reduced by up to 40% in recent days due to speed restrictions on the
Blackwater Railway line serving the port, with inconsistencies in deliveries now
feeding through to vessel loading. The port expects to load 1mt in the coming
week, compared to an average of 1.27mt/week during November.