Commodity price norms invert in June :: Macquarie Research

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Commodity price norms invert in June
Feature article
 We review commodity price and inventory data for June. While metals and
mining commodities held up well amid waves of macroeconomic concern in
the month, there was also a reversal in relative performance for many.
Latest news
 Base metals edged upwards during quiet Monday trading, with the stronger
than expected US macroeconomic data still bolstering sentiment. Nickel
stocks continued their drawdown, falling 3.8% to 106,398t.
 ENRC's CEO is reported by Metal Bulletin as expecting third-quarter charge
ferrochrome prices to fall by 15c/lb to $1.20/lb. He attributed the weakness to
the large fall in nickel prices and subsequent destocking by the stainless steel
industry.
 Inner Mongolia is aiming to cut coal mining companies from 353 to 80-100 by
end-2013, with local private companies consolidating small mines, according
to the China Coal Times. This approach is different to that in Shanxi, where
state run enterprises were asked to take over a much larger number of
smaller producers. This consolidation is unlikely to be as disruptive as in
Shanxi, where the process of consolidation has generally been slower than
anticipated (and the costs higher).
 Qinhuangdao shipped 125mt of coal in 1H11, according to sxcoal, up
13.5%YoY. With coal shipments also higher at other Northern ports such as
Huanghua and in the Tangshan area, coal supply growth to the
Eastern/Southern provinces has been strong since the start of this year, rising
23%YoY in the year to April.
 The Goa Mineral Ore Exporters' Association (GOMOEA) expects iron ore
exports from the Indian state to remain flat YoY at 54mt. This is in line with
our expectations, with Goa ore outperforming other states. However, with the
West Coast monsoon now taking hold, the increasing reliance on Goa is likely
to mean an even greater than normal seasonal fall in iron ore exports.
Furthermore, with much of Goan exports being low grade ore, the average
grade out of India is likely to remain well below historical norms. GOMEA also
notes that lagging road infrastructure development in the state will keep a lid
on exports, with 15,000 ore laden trucks currently congesting the roadways.
 Latest iron ore inventory data for smaller Chinese mills has shown a further
fall, with levels now lower than at the end of the last destock cycle in March
(when iron ore prices subsequently ran up $15/t). Furthermore, there is no
indication that smaller mills are slowing production – iron ore consumption has
risen 3% over the last two weeks, according to the responses from the mills.
Given the low level of inventory, we expect to see some buying activity in the
near term that will at least stabilise spot prices, if not lead to a mini recovery.
However, steel prices are falling and inventory of steel has flat lined
suggesting demand is stagnating into the summer, in line with the normal
seasonal trends. This would suggest that steel production needs to be
reduced into July and that another round of iron ore price falls is likely before
a stronger rally can occur. We maintain that a strong level of support lies
between $150-160/t and do not expect prices to fall below this level even after
any steel production cuts.