Macquarie Research, Commodities -The slow steel consolidation grind

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Commodities Comment
The slow steel consolidation grind
 We review the recent publication of the top 20 steelmakers in 2010 (by Steel
Business Briefing). The ex-China recovery is prominent; however, despite an
all-time high top-twenty producer share of 43% of output, steel continues to
lag well behind its raw material peers in terms of consolidation. The focus
remains very much on the Chinese steel industry, where we are cautiously
more optimistic on consolidation in the medium term; however this is likely in
steps rather than leaps.

Latest news
 Most LME base metals prices fell heavily in trading on Wednesday, with
substantial selling reported across the market. Zinc saw the steepest drop of
more than 5% on the day, weighed down by worries over the continuing buildup
in exchange stocks, with well over 30,000 tonnes delivered into LME and
SHFE warehouses in the last three days and more metal reported to be en
route for exchange warehouses. Lead prices fell by over 4% and copper
closed 2.7% lower at $9,257/t ($4.20/lb). The aluminium price, however, held
up relatively well, giving up only 0.7% on the day, with support coming from
the fact that supply to the market continues to be affected by the impact of
Chinese production cuts in the latter months of last year.
 In copper, we would flag market reports of some copper held in bonded
warehouses in China being offered for sale into the market at below LME
prices – in other words, for negative physical premiums – as the level of
stocks held in these warehouses reportedly continues to increase. We have
drawn attention to falling physical premiums as a clear sign of softness in the
current copper market and at odds with recent record-high exchange prices,
but this is the first time that we have seen reports of negative premiums for
copper, unlike zinc, for which some negative premium business has been
reported in previous weeks. Credit constraints continue to restrict trading of
both base metals and concentrates and are also reportedly bringing pressure
to bear on some holders of physical metal to liquidate inventories, reinforcing
the conviction in our call for soft-term softness in base metals prices, with the
exception of aluminium.
 Antofagasta held a sell-side analyst roundtable on Wednesday, outlining that
there were teething problems with Esperanza's ramp-up, with two to three
concentrator outages during the quarter. In addition, the chemical mix for the
sea-water flotation was resulting in a copper concentrate below the 28%
specification that it was targeting. However, despite these setbacks
Antofagasta is confident that it can make up any losses in the second half of
the year, and full-year production guidance for remains unchanged. As we
have flagged before, given Esperanza is adding 40% in production volume
growth in 2011, any delays in ramp-up or production guidance downgrades
will potentially be taken negatively by the market through 2011.
 Copper mine supply globally growth is very 2H1-based, with 1H11 set to be
very poor. This, together with an easing in Chinese credit constraints and a
continuing recovery in developed-world consumption, should feed through to
a tighter copper market by mid-year/3Q11. While there may be some more
downside in copper in the short term, this month is set to be the buying
opportunity.