Macquarie Research, Oil and its interaction with other commodity prices

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Commodities Comment
Oil and its interaction with other commodity prices
Feature article
 We review the potential impact of an oil price shock on commodity demand
and commodity prices, given the ongoing unrest in the Middle East. History
suggests that even supply driven oil price spikes are strongly positively
correlated with rising copper / commodity prices during the spike period,
although large supply driven oil price spikes tend to eventually restrain global
demand and result in weaker commodity prices in the ensuing period. There
is no doubt that a supply driven oil price shock is incrementally bearish, with
the extent of the impact set to be driven by how much supply is affected.

Latest news
 Copper (-1.6%MoM) and lead (-1.1%MoM) fell sharply as the oil price jumped
higher in Wednesday trading.
 As we approach the end of February, we can now make decent estimates for
2Q contract prices for Vale and Rio Tinto given their use of the average
December-February quotational period. For Rio, we see a 25.2% rise into 2Q
to $171.6/t FOB Aus – ~17% above the previous record achieved In 3Q 2010
and just under $6/t above our forecast. For Vale, the rise will be 20% for
Southern System Fines to $172.5/t FOB. The reason for the lower rise is due
to freight – Vale uses their cost of freight (~$21/wmt) compared to $19.3/wmt
spot average over the period. Thus, while the higher freight rates have
benefitted Vale thus far in price calculations this quarter, it will cause some
relative underperformance.
 Power supply to NALCO's 460,000t Angul aluminium smelter in Orissa may
be disrupted over the coming month, owing to a shortage of coal. The supply
from the Mahanadi coalfields has been halted since 17 February following a
blockade by protestors owing to "local issues". A senior company official said
the aluminium smelter has only a stock of about 200,000t of coal which can
last for only about ten days, and that a decision on whether to cut output
would need to be made in the next 1–2 days.
 It’s been raining cats and dogs (as they say), over the second largest uranium
mine in the world, Rio Tinto/ERA's Ranger mine in the Northern Territory. The
mine is open pit, and rainfall of 518.6mm has been measured nearby over the
past 11 days (190.4mm on Tuesday). Given ERA recently released a
statement saying it was shutting down production for a period of 12 weeks
from its plant to avoid its tailings dam overflowing, this rainfall could see the
shut down go on for longer than initially thought. The other impact could be
that output from the mine itself could be disrupted due to flooding. Either or
both is set to see ERA short uranium and purchases in spot to cover its
position (or consumers purchasing in spot to cover their positions).
 Canadian-listed nickel producer Sherritt reported production of 33,972t of
refined nickel and 3,706t of refined cobalt in 2010, pretty much flat YOY at an
average cash cost of $3.33/lb, 12c/lb higher YOY. It reported that
construction is nearing an end at the $4.76bn Ambatovy HPAL nickel project
in Madagascar (40% Sherritt, 27.5% each for Sumitomo and Korea
Resources) and that first metal production is anticipated by "summer 2011".