Commodities Comment Physical ETFs: Prices hold up as ETF holdings fall :: Macquarie Research

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Commodities Comment
Physical ETFs: Prices hold up as ETF
holdings fall
Feature article
 Physical ETFs have for the most part declined in size of physical holdings of
metals in the first half of the year. But this has seriously undermined prices
despite the substantial impact on physical market balances. This would
suggest pricing could rise sharply higher if investment interest via ETFs
returns in 2H11.
Latest news
 Base metals rebounded on Tuesday, mainly due to the lack of further bad
news concerning Europe. Copper rose 0.8% to $4.37/lb, while lead was the
biggest gainer, up 2.2% to $1.24/lb. In contrast, precious metals sold off, with
silver down 4% to fix below $35/oz. Meanwhile, spot iron ore prices continued
their bounce, with the Platts 62%Fe CFR assessment up $1.25/t to $175.25/t.
As we have been highlighting, low inventories and continued production
strength are keeping small Chinese steel mills in the market for ore,
encouraged by rises in the SHFE rebar contract, which hit a one-month high
on Tuesday at RMB4,873/t.
 Peru's copper production dropped 4.7% YoY in May to 98,628t, with big
declines from Southern Copper Corp.'s mines, according to the country's
mining ministry. Meanwhile, zinc production fell 6.9% YoY to 121,253t and tin
by 24.7% YoY to 2,189t. Further down the Pacific coast in Chile, Codelco
confirmed it expects to lose 4,900t of copper output from plan due to
Monday's 24-hour strike by the Copper Workers Federation.
 Reuters has reported that Tajikistan's state-owned aluminium company,
TALCO, cut production by 16.7% in the first half of 2011 due to a series of
repairs to outdated equipment. Production in June fell to 18,409 tonnes, down
14.8% compared with the preceding month and 37.2% less than in June
2010, with a quarter of pots being offline. Aluminium accounts for ~60% of the
country's export revenues, and in May TALCO reduced its full-year production
forecast to 310kt, down 11% when compared to 2010's 348,850t.
 The United States International Trade Commission released base metal
import data for May on Tuesday that highlight that copper imports rose 19.7%
YoY in the first five months of 2011 to 312,621t. However, the 51,432t YoY
delta does not get anywhere near offsetting the 482kt YoY drop in Chinese
imports over the same period. Meanwhile, aluminium imports dropped 12.7%
YoY and zinc imports 2% YoY.
 127 Capesize vessels were delivered to the bulk freight market during 1H11,
accounting for almost 23m dwt of capacity. Even with a record scrappage rate
of 48 vessels in the half, over 17.6m dwt of net capacity was added,
representing an 8.3% increase in total fleet size over the six-month period.
With a current orderbook of over 100m dwt further Capesizes, we expect the
market to remain oversupplied for a prolonged period.