Divergence in April commodity prices :: Macquarie Research

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Divergence in April commodity prices
Feature article
 We review commodity price and inventory data for April. In a mixed month
dominated by geopolitical news flow and the aftermath of the Japanese
disaster, oil and silver were the big winners.

Latest news
 Metals fell sharply in Wednesday trading as low levels of liquidity in
yesterday‟s session coupled options expiry on the LME and poor economic
data out of the US saw risk taken off across markets. The ISM nonmanufacturing
PMI was weaker than expected in the month, declining to 52.8
from 57.3, while the ADP private sector employment report also came in
below expectations ahead of the all important Non-farm payrolls data at the
end of the week. Nickel took the biggest hit among the LME metals, down
5.4% on the day, while zinc closed back below $1/lb.
 The Central Bank of Mexico purchased 100 tonnes of gold during February
and March, according to the IMF statistics on international reserves. There
has been no comment surrounding this transaction although if it were an onmarket
transaction it would be one of the largest by a central bank in recent
history. Total net central bank purchases in 2010 were 73t, according to
GFMS.
 Xstrata's copper mine output fell by ~15% QoQ and ~6% YoY to ~210,000t
(equity basis) in Q1 2011. The decline was due to operating problems at
Collahuasi and Alumbrera. Our current modelling of the copper market has
included a forecast 4% increase in the company's copper mine output for
2011. These results highlight once more the risk that copper mine production
underperforms market expectations, which should ultimately be supportive of
prices. Xstrata's zinc mine output was also down, declining by ~8% QoQ and
~6% YoY to ~241,000t due to declining head grades at Antamina as
anticipated.
 Xstrata‟s thermal and coking coal production held up relatively well given the
challenges in Q1. Thermal coal output rose YoY despite outages at
Rolleston, Ulan and Blakefield South in the quarter, with the drop in coking
coal production of 15%QoQ much better than peers.
 Antofagasta also reported Q1 copper output, with the 130kt figure coming in
below many expectations reflecting slower ramp-up at the key Esperanza
mine. Yet again, this reflects the difficulties in bringing copper supply to
market on target, as has been the perennial problem. With this and other
output target reductions (Rio Tinto) we have already eaten well into the 2011
disruption allowance built into our supply-demand balance in the first quarter
alone.
 German engineering federation VMDA has noted that plant and machinery
orders in the country grew 18% YoY in March, and 32% for Q1 as a whole.
The federation expects a growth rate of 14% over 2011 as a whole, reflecting
partially the current machinery boom boosted by strong margins in both
metals and mining and agricultural commodities.