Silver: too early to catch the falling knife :: Macquarie Research

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Silver: too early to catch the falling
knife
 Silver has been incredibly volatile in the last month or so, with the risk to
prices remaining tilted to the downside.
Latest news
 Metals were stabilised in Monday trading as markets were calmer following
the dramatic declines last week. We are cautious in the short term given
fragile sentiment and the likelihood of lower leading economic indicators.
 The latest 10 day production data from the China Iron and Steel Association
shows another upward push in the last 10 days of April, to 1.941mt/day
(708mtpa) and the second highest level ever after the middle 10 days of
March. This takes April's average to 705mtpa, up 0.4% MoM. While the
accuracy of these estimates is questionable, they have often been indicative
of the direction of production, and suggest the steady increase in steel prices
over the last month has encouraged production to remain flat.

 Shipments of iron ore from Port Hedland in Australia fell 8.3% MoM to
192mtpa in April, reinforcing the tightness in supply in a market stretched to
the limit. However, the throughput was up 8.9% over April 2010 and
compares favourably to the 174mt average for 2010, as key users BHP and
Fortescue have pushed up output in the past year.
 Molybdenum producer Thompson Creek reported record production results
for Q1, at 10.3m lbs of molybdenum, up 25% YoY. However, the company
downgraded full year guidance by ~5% to 28-32m lbs due to increased
stripping and lower grades set to be encountered in the second half of the
year. When this is combined with Rio Tinto's guidance for reduced production
in 2012 at its Bingham Canyon mine and a likely reduction in Chinese exports
towards the tail end of 2011, the molybdenum market is set to tighten up over
the next year. Furthermore, the company increased capex for its Mt Milligan
copper-gold mine by 38%, another indication of the rapidly rising capital
intensity of mining projects.
 Peruvian mines produced less zinc, lead and tin output in Q1 2011 than in the
same period a year ago, according to the latest data from the Ministry of
Mines & Energy. Production of zinc-in-concentrates fell by 8% YoY to
~332,400t and of tin-in-concentrates by 5% YoY to ~8,600t. Peru is a main
supplier of both materials, accounting for 11% and 12% of world output,
respectively, in 2010. Peru's share of world lead mine production is smaller at
~6% but the latest data show that the country's output of lead-in-concentrates
fell much more heavily, down by 25% YoY to ~51,000t in Q1 2011, and that
the rate of decline accelerate in March.
 In Indonesia, tin surveyed for export prior to shipment increased by 23% YoY
to 9,708t in April. This is the highest monthly total recorded in the last two
years and is the highest figure for April since the export licensing system was
first introduced in 2007. On a three-month moving average basis, tonnage
surveyed for export was up by 18% YoY to 8,313t for the period February to
April 2011. The rise in exports is attributed to better weather conditions in
recent weeks and the incentive of record high price levels.