Commodities:: Pricing arbitrage effect evident in China’s preliminary June trade --Macquarie Research,

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Commodities Comment
Pricing arbitrage effect evident in
China’s preliminary June trade
Feature article
 We review Chinese preliminary trade data for June, which reinforces that
price arbitrage remains a key factor in determining China’s call on
international markets.
Latest news
 The vast majority of commodities took a price hit on Monday, as Eurozone
fears returned with a vengeance. Only gold and silver rose on the day, with
aluminium falling 2.3% and nickel 2.8%.
 Chinese inflation data was above consensus expectations, rising 6.4%YoY
from 5.5%YoY in May. PPI also rose in the month to 7.1%YoY from 6.8%YoY
in the previous month. While the sharp increase in headline inflation was
sudden and unexpected, it was mostly due to sharp gains in pork prices,
which shouldn't be persistent. Headline trade growth suggests domestic
activity has cooled, with imports slowing to 19%YoY from 28%YoY in May,
with export growth down to 18%YoY.
 Merafe Resources has confirmed the settlement of the 3Q11 European
benchmark ferrochrome price at US$1.20/lb, very much in line with market
expectations over the last few weeks. The moderation in the rate of growth of
stainless steel output is seen as the primary reason behind the price decline.
Nickel price weakness over Q211 has put pressure on stainless steel prices
resulting in inventory adjustments by distributors and users of stainless steel.
 The China Iron and Steel Association has upped its forecast for 2011 crude
steel production to over 700mt, from a previous estimate of 660mt. Speaking
at a conference, CISA deputy secretary, Li Xinchuang, also acknowledge that
China will remain highly dependent on imported iron over the next 5-10 years
but in the long haul this dependency will be reduced by the increase in
domestic ore production and scrap generation. In our view, China's domestic
iron ore production will fall to below 100mt by 2018 from ~350mt this year as
lower cost seaborne supply takes market share from 2015 onwards.
 In Indonesia, tin surveyed for export prior to shipment (as required by the
Ministry of Trade) rose by 35% YoY to a 28-month high of 10,875t
in June. The total tonnage surveyed this year to date is up by 16% YoY
to 50,163t as supply has risen in response to the record high prices of recent
months. Indonesia is the world's second largest tin producer, accounting for
16% of global finished refined tin output in 2010, and the major supplier to the
international market.
 The Australian carbon cost mechanism released on Sunday is likely to have
the largest impact on the coal miners under the current assumption. The
scheme is expected to add ~A$1-2/t to costs, and may have a significant
aspect on highly gaseous coal operations currently in ramp up mode. Some
coal producers will qualify for assistance under the current scheme. The coal
sector is most affected by the carbon pricing scheme given its relatively higher
emissions from fugitive emissions from the coal mining prices.