Macquarie Research, Commodities : 10 shocks in 2011

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Commodities Comment
10 shocks in 2011
Feature article
 In this note, we call upon Macquarie‟s economists and commodity analysts
from around the globe to question conventional wisdom and consider events
that are not part of our base case assumptions, but are likely and impactful
enough to be worth of consideration. We present ten possible scenarios for
2011.

Latest news
 Base metals were mixed through the week, with aluminium (1.7%), lead
(3.4%) and cobalt (2.3%) leading the gains, while copper and nickel fell ~3%
 Aluminium output in China fell to an annualised level of 14.6mt in November
from 17mt annualised in June. Higher power tariffs and closures of inefficient
capacity owing to government regulations reduced production between June
and September, and outright power cuts (following government measures to
reduce power consumption in order to reach targets set for its 11th 5 year
plan) saw further declines between September and November. The latter
government driven power cuts to smelters have rolled off as of 1 January and
an immediate production ramp up was anticipated. This ramp up is needed to
bring the Chinese aluminium market from its current deficit position back
towards balance. However, cold weather in December and January is set to
slow the January ramp up down significantly. Indeed, China‟s Southern Power
Grid, the nation‟s second-largest electricity distributor supplying power to five
southern provinces of Guangdong, Guangxi, Yunnan, Guizhou and Hainan,
activated its Level-2 Disaster Response Plan yesterday, noting that persistent
cold weather may threaten its grid operations.
 Meanwhile, frozen ice has been affecting power transmission/distribution
across Henan, Hunan, Guizhuo, Yunnan, and power plants have been shut
due to a lack of coal in Sichuan and Hunan. In particular, aluminium restarts in
Henan, a province which represents almost 20% of Chinese aluminium output
alone, are highly likely to be delayed as a result of issues with power.
Quantifying the impact of the issues with power is difficult but it seems clear
that production is set to remain at best at 14–15mt in January, meaning
further stock declines in China in aluminium are anticipated through 1Q at
least.
 The Steel Index 62%Fe CFR China iron ore assessment rose 1.5% on the
week, despite concerns that the coking coal shortage would impact iron ore
demand. We would highlight that the marginal buyers in the spot iron ore
market tend to be small Chinese mills, which are not exposed to the
Queensland situation for their coal supply and whose domestic coal price has
seen limited movement. Indeed, with steel prices and production levels
continuing to rise in China, these mills have capacity to pay more for iron ore
in the short term, and thus there is a strong chance the spot price could
continue pushing upward until Chinese New Year.
 Seaborne thermal coal prices soared on Friday to end the week incredibly
strong. There were 3 physical trades for Newcastle at very strong prices, with
Feb 2011 trading at $140/t then again at $143.50/t, with May 2011 at $133/t.
Paper markets traded higher, with Feb 2011 swaps up to $128/t for API#2,
$129.75/t for API#4 and $137.25/t for Newcastle.