What do metal premiums tell us about current market conditions? \Macquarie Research,

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What do metal premiums tell us about
current market conditions?
 The latest base metals premiums suggest caution in the copper market, firm
balances in the markets for aluminium and zinc – due in part to limited access
to stocks – some softness in lead and renewed tightness in tin.
Latest news
 LME base metals prices were weaker on Wednesday as worries over the
world economic outlook intensified with another set of disappointing data.
The US ISM index of business conditions in service industries dropped to 52.7
in July from 53.3 in June. Nickel was hit hardest, falling by 4% on the day.
Aluminium and zinc dropped by over 2%, while copper closed with a loss of
1.5%, but was still above $9,500/t.
 Precious metals prices were mixed. Gold gained 1.9% to post a new record of
$1,669/t.oz, while silver added 3.3% to top $41/t.oz. However, PGM prices fell.
 Antofagasta has announced copper mine output of 159,000t for 2Q 2011,
which was broadly in line with our expectations and is in contrast to
disappointing production results reported by a number of other major miners
in recent months. The company is maintaining guidance for full year output of
~620,000-640,000t (100% basis), which would mark an increase of ~20% from
the 2010 level.
 North American lead-acid battery shipments rose by 9% MoM and 5% YoY to
10.3m units in June. In the first six months of the year, shipments reached a
new record of over 60m units, 6% above the level in the corresponding period of
2010. While these are strong readings and supportive of lead demand in what
is the world’s second-largest regional market, this is insufficient to offset the
present softness in China, the world’s largest market, as a result of the
government’s crackdown on pollution by the lead and battery industries.
China accounts for ~45% of world lead demand, which is two-and-a-half times
the size of the market in North America.
 Brazil’s iron ore exports recovered to 339mtpa in July, the highest monthly
level in 2011, but still 4% below the peak of October 2010. Exports to China
were essentially flat MoM, while those to ex-China were surprisingly strong at
183mtpa, the second-highest level post-crisis. Meanwhile, pressure on the
Indian iron ore supply continues, with 19 mines suspended in Goa for
operating without a permit. We think this is likely to have little impact during
the current monsoon season, but could affect shipments later in the year.
 The global gold hedge book saw a small amount of net hedging in 1Q 2011,
according to GFMS, with a net rise of 0.19m t.oz to 4.88m t.oz (151t). This
was the second quarter of net hedging in the last year, albeit in small
quantities. If no new hedging is put in place for the rest of 2011, the hedge
book should decrease by ~25t over the rest of this year, we believe.
 Stillwater Mining, North America's largest PGM producer, reported results for
2Q 2011. While there was little surprise from the mining division, with the
company reiterating guidance of 515koz for this year, recycling has been very
strong, with sales from the recycling business rising by 43% YoY to 104,000
t.oz of PGMs.