Commodities price correction – funds or fundamentals? :: Macquarie Research

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Commodities price correction – funds
or fundamentals?
 Following the steep price declines in most metals prices over the last week
we compare these with bulk commodities and ask what triggered the drop in
metals and whether it is fundamentally warranted.
Latest news
 Metals prices were mixed in trading on Friday. Tin stood out on the upside
with a rise of 2.6%. Zinc made a modest gain while nickel and copper closed
broadly unchanged. However, lead and aluminium both declined on the day.
All precious metals prices fell with silver sinking a further 9.6% to close almost
exactly in line with its average for the year-to-date at $34.2/t.oz. Meanwhile
Brent crude fell by a further 2.6% to below $100/bbl.
 Over the week as a whole, however, almost all metals prices fell heavily.
The main LME metals lost from 5% (zinc) to over 8% (nickel) and gold gave up
3.2%. By far the hardest fall, however, was seen in silver, which was down by
almost 30% WoW. Oil prices also dropped by over 10%.
 US employers added more jobs than anticipated by market consensus in
April. Payrolls increased by 244,000, marking the largest monthly gain since
May 2010, following an upwardly revised rise of 221,000 in March and
235,000 in February, according to the US Labor Department. These data
were reassuring for markets that had become worried that economic recovery
was stalling in the world‟s largest economy.
 Preliminary iron ore export data from Brazil show a rebound from the
lows of March, with a 7% MoM rise on an annualised basis to 292mtpa.
While up 14% YoY, exports remain well below the 352mtpa peak level
reached in October 2010. Exports to China rose 12% MoM to 135mtpa,
while the strength of recovery in the Japanese steel sector following the
March disasters is evident with the second highest level of exports
destined for the country since the financial crisis (42mtpa). In contrast,
exports to Europe fell 16% MoM, albeit compared to an exceptionally
strong March. Exports from the Ponta de Madiera port serving Vale's key
Carajas system continue to disappoint, down over 2mt per month (22%)
from peak levels.
 The inclement Brazilian weather also impacted Vale's Q1 iron ore
production, as widely expected. The Northern System was certainly the
worst hit, with exports down 19% QoQ to 22.65mt. Exports from other
mining systems were also down QoQ (but only in single digits) while pellet
production actually rose 2.5% sequentially. This drop in volumes,
combined with similar weather-impacted underperformance in Australia
and ongoing problems in India, are set to leave seaborne iron ore trade
down markedly HoH in H1 2011.
 Steel rebar has certainly bucked the commodity downtrend over the
past week, with the Platts FOB Turkey assessment rising $17.5/t WoW to
$700/t, a level last seen in January. Firmer international scrap prices and
a pick-up in Turkish domestic construction demand are supporting prices,
while steel flat products have come under price pressure. Indeed, rebar is
now selling at a premium to hot rolled coil in the Mediterranean market.