commodities monthly roundup -- february 2011 · 2011. 2. 2. · mfglobal.com 1 institutional use...

mfglobal.com

1

INSTITUTIONAL USE ONLY

Market Commentary | US EdwArd MEIr +1 203-656-1143Senior Commodity Analyst [email protected]

Commodities Monthly Roundup -- February 2011

Market Highlights for January 2011: The Thomson reuters/Jefferies CrB index was up strongly again this past month, rising some 2% for its fifth straight monthly increase. (See our chart below). A early-month wobble on account of Portuguese fund-ing jitters failed to amount to anything, and instead, prices recovered impressively during the second half of the month as geo-political tremors out of Egypt sent prices soaring once again. The most notable headline came from the crude oil markets, when Brent sailed past the $100 mark this week, its first triple digit close since October of 2008. Base metals were also very

LONDON OFFICE +(44) 207-144-5525NEW YORK OFFICE 1 212-589-6400SINGAPORE OFFICE +(65) 6347 8997

MF Global 717 Fifth Avenue

NY, NY, 10022The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. MF Global Inc. does not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. The principals of MF Global and others associated or affiliated with it may recommend or have positions which may not be consistent with the recommendations made. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading. © by MF Global Inc. (2011) 440 S Lasalle Street, Chicago, Illinois, 60605.

strong, with copper and tin hitting new record highs, while aluminum and nickel sprinted to 28-month peaks. Steel and iron ore prices were also quite firm, as were the grains and the "tropicals", with most hitting either multiyear, or record, highs on account of emerging market buying and lingering weather issues. The one complex sitting things out was the precious metals group; gold was off some 6.2% in January, with the popular SPDR Gold Trust seeing its holdings falling to its lowest level since May of last year. Not surprisingly, with most commodity and equity markets on fire, the dollar continued to lose ground, and is now at a two-month low against the Euro. Short-term, (and by that we mean over the next 1 to 3 months), the commodity spiral seems like it will remain in place on account of the fact that world economies are now all growing, with the US economy reaching its pre-recession 2007 peak after the latest Q4 2010 GDP report was released last week. China has hardly slowed down despite two rate hikes and several increases in bank reserve requirements, (which are now practically dou-

TABLE OF CONTENTS

Market Highlights / Outlook............1-2Energy ............................................... 3Energy Inventories............................ 4 Energy, Emissions, Uranium ........... 5LME Metals........................................ 6LME Metals, Steel, Iron Ore ............ 7Precious Metals................................ 8Grains, FFA....................................... 9Tropicals............................................ 10Currencies......................................... 11Financials ......................................... 12

Source for Chart: Futuresource.com

ble levels mandated for US banks.) Japan continues to grow modestly as well, this despite a downgrade of its sovereign debt by S&P last week. European growth is more patchy, but the region's powerhouse, Germany, is doing very well, with its exports booming and its unemployment rate at an 18-year low. Fund money into the commodity space also remains quite strong.

Inflation Clouds Thicken: despite the euphoria, we have trouble extending the current commodity trend line upwards beyond the second quarter of the year, since in our view, there are several "headwinds" that argue for caution. For one thing, the infla-tionary spiral that is now evident in a number of emerging economies is getting serious; the spiraling cost of food, for example, is leading to civil unrest, prompting shaky govern-ments to release stockpiles and buy even more agricultural commodities, further exacerbating the underlying price advance. Other countries have resorted to interest-rate hikes in order to stem infla-tionary pressures, with China, India, Taiwan, South Korea, Turkey, and Indonesia, among others, all hiking rates of late. Inflation is even pushing higher in advanced economies, with Euro inflation now at a two-year high, prompting some officials to warn of a possible rate increase for later this year. The trend towards tighter money perhaps explains the decline in gold, as investors are sensing that the tendency towards easier money is coming to an end. All this means that commodities could be col-liding against a less-friendly macro backdrop going into the second half of 2011.

©2011 MF Global Inc.

New York (24 hours) +1 212-589-6439 | London +44 207-144-5525 / SingaporeMF GLOBAL COMMODITY ROUNDUP - DECEMBER 2010

The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. MF Global Inc. does not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. The principals of MF Global and others associated or affiliated with it may recommend or have positions which may not be consistent with the recommendations made. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading. © by MF Global Inc. (2011) 440 S Lasalle Street, Chicago, Illinois, 60605.

The Dollar; an upside surprise? - We suspect the dollar will continue to weaken over the short-term given: 1) the recent tax cuts that were enacted 2) the Fed's bond buying program (reaffirmed unanimously at the most recent Fed meeting), and 3) President Obama's State of the Union address, where no major spending cuts (apart from a spending freeze) were announced. None of this policy bodes well for a bounce in the greenback, except for the fact that starting in March/April the republican-controlled House and the administration have to get their hands around a budget and implement spending cuts that all sides seem to know the country needs. In the event of an agreement, which we suspect could be the big surprise of the year, the dollar could see a rather nice bounce, perhaps pressuring a number of commodities lower. In addition, the US recov-ery should also start to look more robust as we head into the second half of the year, prompting the Fed to start backing off its easy money stance late in 2011. Finally, despite dodging the Portuguese bullet earlier this month, the Euro is still not out of the woods, and we may see another dollar "safe haven" rally materialize at any point in 2011. Of course, none of this incorporates what could even happen in the Middle East, where geopolitical developments are unfolding at a blinding pace.

China will likely slow - we continue to have our concerns about China going into the second half of the year, particularly since the authorities are ratcheting up pressure on the economy by tightening the country's monetary base. Although we have not seen much impact on growth or on the trade numbers just yet, each successive interest rate increase will have more "bite" than the one before, and ultimately, the authorities will likely succeed in engineering what they hope will be a soft landing. In fact, several senior Chinese officials are openly saying that further tightening lies ahead, but we think markets have not really focused on this, likely paying more attention when these steps are actually implemented, or perhaps when they see stronger evi-dence of a deterioration in some of the macro data.

Commodity spirals have consequences - As we wrote last month, the danger of transforming commodities into an easy-to purchase asset class, channeled mainly through fund money, means that there are potentially adverse consequences to upside price runs. In emerging markets, higher food prices, have resulted in civil unrest, threatening governments, while soaring base metals prices could lead to demand destruction, metal substitution (in certain applications), as well as a more aggressive sup-ply-side response. Most critical, will be what happens to energy prices; if pricing pressures do not ease, there is a real danger that rising inflationary pressures will accelerate the schedule of interest rate increases that are already on the drawing boards.

New York (24 hours) +1 212‐589‐6439 | London +44 207‐144‐5525 / Singapore

MF GLOBAL COMMODITY ROUNDUP ‐ FEBRUARY 2011

ENERGY

WTI NEARBY CONTINUATION LIGHT CRUDE OIL Last: 92.19 High: 92.84 Low: 88.4 1/31/2011

BRENT NEARBY CONTINUATION BRENT CRUDE OIL Last: 101.01 High: 101.73 Low: 98.5 1/31/2011

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

'1140368'1040004'09

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

Over the last two months, WTI prices settled into an $80‐$92 trading range, and prices were unable to break out from either extreme. On the upside, prices were kept in check by comfortable (al beit declining) inven‐tory levels and evidence of more Saudi production, while on the down‐side, cold weather on both sides of the Atlantic, a firm product complex,rising end‐user demand, and near‐record long positions by the funds,kept values from breaking down. More recently, growing tensions inEgypt have forced prices back to the top end, and we could very well break out and possibly move higher fairly soon. If we approach the critical $100 mark, the Saudis will likely quietly top up the extra 100,000 barrels a day they are already supplying the markets, as they are loathe to repeat the 2008 experience where spiraling energy prices tipped global econo‐mies into recession and destroyed demand. However, before we get to that point, the market itself could work somewhat lower once the Egyp‐tian situation heads towards some sort of ‘resolution’, as we suspect it may, leaving calmer heads to prevail.

Brent looks substantially stronger on the charts than WTI does, benefitingin large part, by the robust arb that recently swelled to about $12, its widest reading ever, before falling to a still‐high $9.6. The strength in thearb is attributable mainly to declining European inventory levels (as op‐posed to the still comfortable situation at Cushing) as well as reports ofsporadic field outages and trader accumulation of some North sea car‐goes that took place in late January. More recently, the Egyptian crisishas triggered a sharper advance. Our charts show that there is goodtrend‐line support around the $94.50 mark, with support also evident at$92. On the upside, although the psychologically important $100 markhas been taken out, more credible technical resistance lies at $107.

RBOB NEARBY CONTINUATION RBOB GASOLINE Last: 249.06 High: 250.25 Low: 248 1/31/2011

I

HEATING OIL NEARBY CONTINUATION HEATING OIL Last: 274.68 High: 275.75 Low: 274.68 1/31/2011

©2011 MF Global Ltd. Source for charts: Bloomberg

'1140368'1040004'09

70.00

90.00

110.00

130.00

150.00

170.00

190.00

210.00

230.00

250.00

270.00

'1140368'1040004'09

100.00

120.00

140.00

160.00

180.00

200.00

220.00

240.00

260.00

280.00

300.00

'1140368'1040004'09

Although gasoline has taken out key resistance at $2.45 to stage a tech‐nical breakout, we are not seeing prices pull away as impressively as this formation would usually imply. As a result, the complex will likely be arelative laggard going forward, looking to crude and heating oil to set thepace. Moreover, gasoline remains under pressure on account of seasonalweakness and the possible start of slight US “demand destruction” espe‐cially as pump prices head towards the $3.75‐$4.00/gallon mark. Howev‐er, any retrenchment back into the trading range will only take place af‐ter the Egyptian situation “settles” a bit. In the meantime, we could see prices pushing to a high of $2.60 (next resistance on the charts), while onthe downside, support is at $2.35, the bottom end of the range.

Similar to gasoline, heating oil prices are also in breakout territory, butunlike gasoline, the complex has capitalized on this formation and pushedsteadily higher during much of January. Charts look fairly wide open, andwe see prices on track to test resistance around $2.81. Heating oil is also benefiting from an extremely cold winter seen in the Northeast so far thisyear, with New York City temperatures hitting a six‐year low during oneparticular week in January. In addition, US distillate demand remains quite firm, particularly compared to gasoline, and should provide ameasure of support to the complex. Support is at $2.56, (previous resis‐tance), with $2.43 below that. .

EIA/DOE Inventories as of December 31st, 2010

(In MB) Current Previous Year Change from lastweek week ago Week Year*

Crude 335,300 339,400 327,300 (4.1) 8.0Distillates 162,100 161,000 159,000 1.1 3.1Gasoline 218,100 214,900 219,700 3.2 (1.6)Heating Oil 45,100 47,400 43,100 (2.3) 2.0Natural Gas** 3,201 3,337 3,150 (136.0) 51.0Imports 8,410 8,780 8,360 (370.0) 50.0Capacity Util (%) 88.0 87.8 79.4 0.2 8.6*unrevised / **for week prior in bcf

Data Sources: EIA/API; Charts prepared by MF Global©

Crude

260000

280000

300000

320000

340000

360000

380000

400000

J F M A M J J A S O N D

'000b

2006 2007 2008 2009 2010

Gasoline

160000

170000

180000

190000

200000

210000

220000

230000

240000


'000b

2006 2007 2008 2009 2010

Distillates

90000

100000

110000

120000

130000

140000

150000

160000

170000

180000

190000


'000b

2006 2007 2008 2009 2010

Natural Gas

0

500

1000

1500

2000

2500

3000

3500

4000

4500


Bcf

2006 2007 2008 2009 2010

Heating Oil

18000

28000

38000

48000

58000

68000


'000b

2006 2007 2008 2009 2010

US crude imports weekly ('000b/d)

6000

7000

8000

9000

10000

11000

12000

F-08 J-08 O-08 F-09 J-09 O-09 F-10 J-10 O-10

US Refining Utilization

55

60

65

70

75

80

85

90

95

100


(%)

2006 2007 2008 2009 2010



ENERGY, EMISSIONS, AND URANIUM

NATURAL GAS NEARBY CONTINUATION NATURAL GAS Last: 4.42 High: 4.435 Low: 4.42 1/31/2011

CRACK SPREADS CRACK SPREADS Gasoline Crack (Red); Heating Oil Crack (Blue) 1/31/2011

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

'1140368'1040004'09

0.00

5.00

10.00

15.00

20.00

25.00

Last month, we wrote that we would not get too skeptical about naturalgas's repeated failure to stage an upside advance, and in January, the price action proved us right when we finally broke through to a five‐month high. The complex did benefit from a degree of index rebalancingthat took place earlier in the month, but as that buying wore off, cold weather in the US Northeast, coupled with likely substitution by the utili‐ty sector away from coal, kept prices fairly buoyant. Although prices havesold off over the last week, they are still within a short‐term up channelthat stems back to last November, and one which will be violated only ifwe break below $4.20. Nevertheless, we still remain would long here andbelieve the complex has a legitimate chance of testing the $5 mark over the next quarter.

Crack spreads have remained elevated, with the heating oil crack beingparticularly strong last month, hitting a fresh two‐year peak as we wentout with this note. Heating oil is benefiting from both the current coldsnap, and for forecasts for continued low temperatures in both the USand Europe going into February. Rising demand for diesel, which is ben‐chmarked against heating oil futures, has also helped drive up flat heat‐ing oil prices, providing additional support for the heat crack. The gaso‐line crack has also risen this past month, but the action here has been farmore subdued than what we have seen in heating oil. We suspect thatboth have a little more room to push higher, although the heating oilcrack has likely seen most of its gains behind it.

EMISSSIONS EMISSIONS EUA Prices #REF! 1/31/2011

URANIUM URANIUM Last: 72.5 1/31/2011


'1140368'1040004'09

12.00

12.50

13.00

13.50

14.00

14.50

15.00

15.50

16.00

16.50

'1140487

40424

40361

40304

40241

'1040122

40057

40001

39.00

44.00

49.00

54.00

59.00

64.00

69.00

74.00

Emission prices dipped below the €14 euro mark in late December for itslowest reading since July. The spot market has been in some turmoil re‐cently, as no more than half of the national registries behind the EU'scarbon market have reopened following a spate of cyber attacks wherethieves “stole” as much as $40 mln from the EU’s emission trading sys‐tem. Futures markets continue to trade, but interest is subdued as the in‐vestigation into what happened continues. In addition, traders were up‐set at the EU after it made an announcement on January 21 saying it hadvoted in favor of a ban on the use of most industrial gas offsets as of Jan‐uary 1, 2013, (prompting a surge in the March 2013 futures contract,) on‐ly to spark a sell‐off when the statement was later rescinded. For thetime being, we suspect a rather uneventful trading range will remain inplace until confidence – and some reform – sets in.

Uranium prices continue to gain ground, and are now flirting with the $70mark. Prices reached a high of $136 a pound in 2007 before falling toabout $40 over the last few years, as the rapid expansion of Kazakh pro‐duction outstripped demand. However, more recently, prices have stagedan impressive recovery on account of increased Chinese buying. Giventhe lack of any major news that we can see, we suspect that prices willlikely push somewhat higher from here, but we may start seeing some‐thing of a stall by the second quarter, as the impact of increased unitsfrom Kazakhstan start to hit the markets. The country produced 10 mil‐lion pounds of uranium last year, and is expected to increase its output substantially this year as well.



LME BASE METALSg

3‐MONTH LME COPPER COPPER Last: 9677.5 1/31/2011

3‐MONTH LME ALUMINUM ALUMINUM Last: 2494 1/31/2011

1,250.00

1,450.00

1,650.00

1,850.00

2,050.00

2,250.00

2,450.00

2,650.00

2,750.00

3,750.00

4,750.00

5,750.00

6,750.00

7,750.00

8,750.00

9,750.00

'1140368'1040004'09

Copper prices hit fresh record highs of just under $10,000 as we werewriting this note, which is quite astonishing given that prices have already surged by a mind‐boggling 50% since the summer. If anything, the short‐term bias will be lower from here, given overbought technical readings, coupled with the fact that we could see a bit of a pullback going into theChinese Lunar year holiday that starts on Feb 3

rd. On the fundamental

side, Chinese import demand remains strong, but nearby physical supply is plentiful, with both LME inventories as well Shanghai holdings continu‐ing to increase ‐‐ further evidence that the rally may be on somewhatshaky ground. Longer‐term, the bigger unknown is whether the Chinese economy will slow down going into 2011 given the continued tightening that the authorities will have to embark on if there are to successfully deal with rising inflationary pressures. In addition high cathode prices could prompt the Chinese to buy more scrap, and in fact, the recent tradedata seems to be bearing this out.

Aluminum prices spiked to a twenty‐eight month high of $2570 as we were writing this note, with the buying accelerating somewhat once $2500 resistance was taken out and after copper experienced its sharp bounce. The fact that stocks are increasing seems to be keep the rally somewhat in check, especially compared to the high‐flying copper com‐plex. In this regard, LME inventories are now up by about 300,000 tons since the beginning of the year, a rather surprising increase given that spreads have tightened considerably over the last six months, and should theoretically act as a disincentive for more metal to flow into warehous‐ing deals. In addition, premiums remain robust, and offer yet another reason for stocks to leave the warehouse, not enter it. Be that as it may, another surplus is expected for 2011, meaning that stocks are likely to in‐crease even more, further limiting upside potential. Consequently, we reiterate our view put forth in last month's note that sell hedges be put on between $2500‐$2800 basis three months and suspect that the spike

3‐MONTH LME ZINC ZINC Last: 2359 1/31/2011

3‐MONTH LME LEAD LEAD Last: 2475.25 1/31/2011


'1140368'1040004'09

1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

2,000.00

2,200.00

2,400.00

2,600.00

'1140368'1040004'09

750.00

950.00

1,150.00

1,350.00

1,550.00

1,750.00

1,950.00

2,150.00

2,350.00

2,550.00

2,750.00

'1140368'1040004'09

on between $2500‐$2800 basis three months, and suspect that the spike above $2550 now on offer should be used to take on some initial expo‐sure.

Like aluminum, zinc also struggled for much of January, weighed down byhigh stocks that were generated by a surplus left over from last year. Inthis regard, the International Lead and Zinc Study Group said in late Janu‐ary that the market was in surplus by about 220,000 tons through No‐vember of 2010. Looking ahead into 2011, the Reuters mean consensusforecast is estimating that another 185,000 ton surplus will hit the marketthis year (slightly higher than the ILZSG’s full‐year surplus projection of 161,000 tons), meaning that we cannot expect to see any meaningful de‐cline in LME stocks, now close to 710,000 tons, a six‐year high. All thisshould keep zinc prices in check, at least through the first quarter of the year, where we anticipate a trading range of between $2100‐$2700.

Similar to zinc, lead has been dogged by excess production, with LME stocks now at about 270,000 tons, up by 60,000 tons just in Januaryalone. According to the International Lead and Zinc Study Group, themarket has been in surplus by roughly 42,000 tons during the first 11months of last year, while a Reuters consensus survey estimates a muchmore modest 19,000 tons surplus to be in store for 2011. Having saidthat, the markets did see something of a serious squeeze in January,where the cash to three’s position ballooned to a $90 backwardation atone point, and although it dipped to $50 on recent price weakness, it hassince rebounded. Despite lead being on track for another modest surplus in 2011, we do not think prices will fall significantly below $2100 over the course of the year, as stocks as a percentage of consumption remain rela‐tively tight, only at about 4.7 weeks. On the other hand, we doubt themarket will have what it takes to comfortably pass the $2800‐$3000 leveleither, given legitimate questions about the strength and pace of Chinesecar demand this year in the wake of the termination of buyer incentivesand more restrictive license issuance to combat growing urban pollution.



BASE METALS, STEEL, IRON ORE

3‐MONTH LME NICKEL NICKEL Last: 27097.5 1/31/2011

3‐MONTH LME TIN TIN Last: 30025 1/31/2011

7,500.00

12,500.00

17,500.00

22,500.00

27,500.00

'1140368'1040004'09

9,500.00

14,500.00

19,500.00

24,500.00

29,500.00

34,500.00

Nickel held up very well over the course of January, and prices are now attwenty‐eight highs. The reason behind the advance is largely attributable to the severe flooding that took place in Australia in January. This severe‐ly reduced the flow of a number of raw materials, including coking coal,an essential ingredient used by about 50% of Chinese pig iron producers. The resulting surge in PI prices prompted stainless users to switch back tomore attractively priced refined nickel. However, outside of this short‐term disruption, nickel’s longer‐term prospects do not look particularlybullish. Chinese stainless steel output is forecast to decline in 2011, likely pressuring prices further, and increasing the odds off another surplus this year, which the International Nickel Study Group expects to be around80,000 tons. (The Reuters average consensus estimates is significantly less, at around 16,000 tons, but there is quite a bit of variation aroundthis number, with a high of +156,000 and a low of ‐15,000). We see nickelprices trading between $21,000‐$32,000 during the first quarter of 2011, with a breakout above $35,000 proving quite vulnerable.

Tin prices made record highs in January, just as many of the other metalsstarted to flag. The action was somewhat surprising given that tin stockshave been climbing steadily for most of the month, and now stand at about 17,000 tons, up almost 20% from where they were at the start ofthe year. However, what seems to have sparked the recent break higher is renewed concern about Indonesian supply. The country's full‐year ex‐ports in 2010 were off nearly 7% from 2009 levels, but January was con‐siderably worse, with exports down a whopping 35% versus Decemberlevels. We remain friendly towards tin going into 2011 given that produc‐tion is controlled by only a handful of producers. In fact, we would not besurprised to see a $40,000 print set in at one point over the year, particu‐larly if there is no measurable improvement in the Indonesian export pic‐ture. In addition, another deficit is expected for 2011, (17,000 tons as perthe latest Reuters consensus estimate) this following a similarly largeshortfall in 2010 as well

LME STEEL STEEL BILLETS Last: 540 1/31/2011

IRON ORE IRON ORE Last: 1/31/2011

©2011 MF Global Ltd Source for charts: Bloomberg

250.00

300.00

350.00

400.00

450.00

500.00

550.00

600.00

650.00

4036139997'09

'1140368'1040004'09shortfall in 2010 as well.

LME billet prices have been firm this past month, fluctuating between$540‐$585 during most of the month. Outside of the billet market, steelprices, in general, have remained elevated, propped up mainly by stronginput prices, particularly for iron ore and coking coal. Supplies for bothhave been pinched recently on account of recent Australian floods. How‐ever, steel makers are finding it difficult to pass on the full extent of thesecost increases to their customers, so profit margins remain under pres‐sure for most of them. Looking ahead into 2011, there are legitimatequestions about whether the recent advances could be maintained. Forone thing, steel demand, which increased by 13% in 2010, could rise byno more than 5% in 2011, this according to the World Steel Association.Chinese steel demand could be under further pressure in the monthsahead as well, particularly as the government intensifies pressure on thereal estate sector. (Construction already accounts for about half of thecountry’s steel demand, and so any slowdown here would be a significantgame‐changer). In addition, Chinese steel producers could ramp upsupply going into the New Year if power restrictions are lifted. As a result,we would be cautious on prices going into the second half of 2011.

Iron ore prices strengthened again in January to close at $186, a level last seen in May of 2010 and not far off the 2008 high of $210, with prices ris‐ing again on supply‐side concerns. In this respect, the Indian Supreme Court has recommended that Karnataka state lift its export ban, but as expected, a final decision has again been delayed to mid February. Meanwhile, heavy rains in Brazil delayed 600,000 tons of shipments from Vale, and imports in Pilbera were shut for a few days on account of a passing cyclone. While exports may pick up in February once weather‐related impacts subside, overall supply is likely to lag demand again this year. Indeed, the growing consensus is that the supply‐side response will be much slower than originally thought, a notion supporting the flurry of takeover activity we have also been seeing recently. While we are con‐cerned about a demand‐side shock at some point, we do not think it will happen just yet, as we are entering the seasonally strong restocking sea‐son which typically follows the Chinese New Year. (Contribution by And‐rew Gardner).



PRECIOUS METALS

GOLD COMEX NEARBY CONTINUATION GOLD Last: 1333.8 High: 1336 Low: 1333.8 1/31/2011

SILVER NEARBY CONTINUATION SILVER Last: 28.169 High: 28.425 Low: 27.52 1/31/2011

800.00

900.00

1,000.00

1,100.00

1,200.00

1,300.00

1,400.00

1,500.00

'1140368'1040004'09

8.00

13.00

18.00

23.00

28.00

33.00

Gold has had a very sloppy start to the year, with prices off by some 6.2% year‐to‐date. The sluggish performance is somewhat surprising given theincreased talk about inflation ‐‐ both potential and real – that is sweepingthe globe. We suspect the weaker tone in gold is attributable to investorssensing that the era of easy money is coming to an end. Although the Fedremains very loose, other emerging markets are tightening their mone‐tary base, while in Europe, the ECB is talking about rate increases as well. Having said that, there is very good support for gold around $1320 on the charts, while fundamentally, the recent troubles in Egypt have also given the complex a shot in the arm. In addition, investment demand for goldremain strong. Although gold holdings in the main SPDR gold trust shrunk to an eight‐month low, it was up 20% last year and more than 50% theyear before that. Jewelry demand was also up some 18% last year despite higher prices. We suspect that interest from both these channels will re‐main strong going into 2011, but we are not sure if this buying will beenough to lift gold to new highs later in the year given the stronger dollar and a round of rate increases that we expect will be on tap.

Not surprisingly, silver has followed gold by moving sharply lower, and isnow hovering at just over $28 an ounce. Our charts indicate that theshort‐term uptrend line has been broken, and it now looks like we could move somewhat lower into a trading range between $25 to $31. On the fundamental side, the market is expected to be in surplus this year, andalthough this plays a secondary role for the moment, it could exert addi‐tional downside pressure on the complex later in the year where we ex‐pect the impact of the stronger dollar to be more keenly felt. We did get to a high of just over $31 an ounce in late 2010, and so our eventual up‐side target of $35 an ounce still seems reasonable in 2011.

PLATINUM NEARBY CONTINUATION PLATINUM Last: 1797.5 High: 1797.5 Low: 1797.5 1/31/2011

PALLADIUM NEARBY CONTINUATION PALLADIUM Last: 820.1 High: 822.5 Low: 802.85 1/31/2011

©2011 MF Global Ltd Source for charts: Bloomberg

'1140368'1040004'09

150.00

250.00

350.00

450.00

550.00

650.00

750.00

850.00

950.00

'1140368'1040004'09

900.00

1,100.00

1,300.00

1,500.00

1,700.00

1,900.00

'1140368'1040004'09

Platinum has held up better than both gold and silver have in terms of apercentage decline, perhaps because the complex did not push as high asthe other two did. In fact, prices right now are just over $1800 an ounce,only $40 an ounce away from the recent high of $1850 hit a few weeksago. Our charts show that the recent decline has not been seriousenough to dent the short‐term uptrend line that has been in place sincelast summer, and which will only be taken out if prices below $1725. Be‐low that, there is very good trading range support at $1630, which wesuspect will not be reached any time soon. Fundamentally, althoughAsian auto sales are slowing somewhat, they still remain at fairly elevatedlevels, which means that demand should remain strong going into 2011. For what it's worth, a Reuters poll of analysts is forecasting a median price of $1800 an ounce for 2011 compared to $1611 achieved last year.

Similar to platinum, palladium has also held up reasonably well in Janu‐ary, and in fact, finished the month slightly on the positive side. The com‐plex is coming off a stellar year, where it was the best performing com‐modity of 2010. We believe the metal should continue to do well going into 2011, as production is projected to show no growth this year, and infact, has basically been flat since 2008. In addition, Russia’s Norilsk ex‐pects the country’s state repository (Gokram) to deplete its palladium in‐ventories this year. On the demand side, consumption is estimated tohave risen by 11% in 2010 from 2009 levels largely on account of very strong Chinese offtake, which will likely grow at a similar rate this year. One unknown, and a possibly bearish element, is how Chinese car saleswill play out this year in light of more stringent controls on issuing li‐censes and an end to car incentives. Technically, the long‐term continua‐tion charts shows some resistance around the $860 level, but above that,things are wide open until at least $1070 mark, which was reached in late2000. Support is between $720‐$740, a point at which we would look toadd to existing long positions. Finally, a Reuters poll released in Januaryhas analysts forecasting a median price of $795 for the metal in 2011,substantially higher than the $519 forecast made in July.



GRAINS, FFA

CORN NEARBY CONTINUATION CORN Last: 659.5 High: 659.5 Low: 650 1/31/2011

WHEAT NEARBY CONTINUATION WHEAT Last: 840.75 High: 847 Low: 838 1/31/2011

275.00

325.00

375.00

425.00

475.00

525.00

575.00

625.00

675.00

725.00

775.00

'1140368'1040004'09

400.00

450.00

500.00

550.00

600.00

650.00

700.00

750.00

800.00

850.00

900.00

Corn prices continued to push higher throughout January, and now standat a 26‐month high. As has been the case with all the grains this pastmonth, weather, as well as other supply bottlenecks, are creating havoc in the complex. A port strike in Argentina for example, was one of thebullish variables that sent prices higher earlier in the month, this coming on top of a downward revision to the Argentinean crop by some 6%. Also on the supply side, the USDA expects US reserves of corn to fall to itslowest level in some 15 years by early September, a 56% decline from the beginning of 2010. The 2011 US corn crop itself is forecast to be 3% lower than in 2010, but because demand remains strong for ethanol produc‐tion, animal feed, and exports, this is the wrong year for a decline. On the demand side, with food inflation whipping through a number of emergingmarket economies, governments are stepping up purchases in order toplacate a restless public. Technically, the corn charts look very solid, withprices likely on track to test $7 mark. Although the market is quite over‐bought, corn‐‐ like most of the other grains‐‐ will likely signal its top in itsown time.

Wheat has had an explosive January, with prices gaining almost$2/bushel just in January alone, while practically doubling from June le‐vels. Prices are now at a 27‐month high, and as was the case with corndiscussed above, a plethora of problems is hitting the sector, both on thesupply and demand side. On the buy side, a number of Middle Easterncountries are stepping up their purchases of wheat, while releasingstockpiles in order to relieve soaring domestic prices. In this regard, Alge‐ria bought some 1.8 mln tons of wheat in January, as well as another800,000 tons of duram wheat. Egypt has also been buying extra wheatfrom the spot market, as has Indonesia. On the supply side, a Russian ex‐port ban imposed in August continues to pinch supply. (The Russian 2010wheat crop itself is down a whopping 33% compared to 2009). Else‐where, cold weather in the US, a drought in China and South Africa, andfloods in Australia, is raising further questions about prospects fromthose countries. Technically, $9.50 on the charts beckons, and there is lit‐

SOYBEANS NEARBY CONTINUATION SOYBEANS Last: 1413 High: 1413.5 Low: 1403.5 1/31/2011

FFA FFA Baltic Prices 1/31/2011


'1140368'1040004'09

800.00

900.00

1,000.00

1,100.00

1,200.00

1,300.00

1,400.00

1,500.00

'1140368'1040004'09

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

'1140361'1040004'09

Capesize Panamax Supramax Handysize

Soybeans have charged higher in January, and prices are now trading atjust over $14/bushel mark, about 60% higher than where we were lastfall. Chinese buying continues to be the main driver, with the country ex‐pected to import some 57 million tons of crop in the 2010/2011 market‐ing year. Of this amount, about 24 million tons will come from the US. Inlight of this heavy uptake, inventories will remain tight, with the USDA es‐timating that soybean stocks will decline to 140 million bushels by Augustof this year, equivalent to 4.2% of annual consumption and the lowestending stock ratio in three decades. On the supply side, US soybeanplantings may decline .3% this year versus last year, as farmers allocatemore acreage to other crops. Dry weather has also been impactingthings, with drought damaging the Argentinean crop. Technically, the soybean charts look very solid; we suggested in last month's commentarythat $15.70 was the next upside target, and although we have not gottenthere yet, that seems to be the next logical target.

We wrote in last month's commentary that freight prices were likely to bump along the bottom for a little while longer, but we were wrong onthat count, as the Baltic dry Index proceeded to fall yet again, this timealmost 20% on the month to its lowest level in almost 2 years. Severefloods in Australia virtually curbed all coal shipments, and there has beensome reduction in iron ore shipments as well, although a pick‐up in graincargoes going to China did help limit the declines in Panamax ratesslightly. We expect to see a modest improvement in prices going intonext month, as supply bottlenecks start to ease, necessitating the needfor more charters. .

y, $ ,tle reason we see that we will not get there given the production uncer‐tainties spreading across a number of producing countries.



TROPICALS

SUGAR NEARBY CONTINUATION SUGAR Last: 33.97 High: 34.1 Low: 32.59 1/31/2011

COCOA NEARBY CONTINUATION COCOA Last: 2185 High: 2190 Low: 2156 1/31/2011

10.00

15.00

20.00

25.00

30.00

35.00

40.00

'1140368'1040004'09

1,500.00

1,700.00

1,900.00

2,100.00

2,300.00

2,500.00

2,700.00

Sugar prices have been on a tear, and have now more than doubled sincethe end of June largely on growing concerns about an earlier 4.5 milliontons surplus that is vanishing into an expected deficit for this year. De‐spite the complex being severely overbought, there is no let up in the ad‐vance; last week, for example, sugar had its biggest two‐day move in some three months on hints that the EU would increase its purchases,and on reports that Russian demand may rise. In the former case, the EUsaid it may allow additional import quarters to boost regional supplies, while Russia said it will reduce its import tax on sugar to $50 from $140by March, two months earlier than planned. In the meantime, a Reutersanalysts polled is forecasting a first quarter sugar price of $.3440 cents,up from the $.3040 forecast last July. Questions about Brazil's crop should keep values relatively well bid going into February, but in all like‐lihood, the complex is setting itself up for a sharp fall by the second quar‐ter, when we get somewhat more visibility on next year’s plantings.

Cocoa prices have had an explosive month in January, being the best per‐forming commodity and rising some 10% during the period. The rallypicked up steam during the second half of the month after the IvoryCoast's presidential claimant called for a month‐long ban on cocoa ex‐ports in an attempt to squeeze the funding of his rival, who by all ac‐counts, has lost the election, but refuses to quit. The Ivorian winner also warned of sanctions on exporters if they violate the ban, and most ma‐jors seem to be complying with the order. As a result, the market is scrambling to secure supply ahead of Easter, when demand for chocolateis seasonally at its highest. The ban is taking its biggest toll on local Ivo‐rian farmers who are expected to produce the bulk of this year's bumpercrop of about 1.3 million tons. However, protracted delays in getting thecocoa out could lead to spoilage, and this will likely keep the market wellbid at least for the next several weeks. Technically, our charts show a

COFFEE NEARBY CONTINUATION COFFEE Last: 244.8 High: 250.75 Low: 243.25 1/31/2011

COTTON NEARBY CONTINUATION COTTON Last: 168.44 High: 168.75 Low: 165.46 1/31/2011


100.00

120.00

140.00

160.00

180.00

200.00

220.00

240.00

260.00

'1140368'1040004'09

35.00

55.00

75.00

95.00

115.00

135.00

155.00

175.00

'1140368'1040004'09

'1140368'1040004'09short‐term top around the $2380 mark, but the odds are good that wecould push right through it given the unsettled situation.

Coffee prices have not done much this month, basically trading in a verytight range for most of the period. However, prices have remained ratherelevated, and close to multi‐year highs in light of the fact that the Ivorianexport ban also applies to coffee exports. That, in fact, is beginning toshow up in the numbers; December exports, for example, were downsome 38% month over month, and we do not expect much improvementwhen the January numbers come out either. Outside of the Ivory Coast, adverse weather in Brazil and India will pare 2011 global supplies, withthe situation in Brazil being especially worrying. In this respect, the Brazil‐ian coffee crop is estimated to come in around 37 million bags, down 23%from 2010 levels. Relatively low global stockpiles should also provide un‐derlying support, and we likely will see prices moving higher through thefirst quarter.

Cotton was the best‐performing CRB commodity in 2010, and started2011 in equally spectacular fashion, rising some 10% so far this year to anew record high. In addition to weather‐related problems that seem tobe plaguing most agricultural commodities, Chinese buying is also figuringprominently in leading prices higher. China imported 2.8 4 million metrictons of cotton last year, the most since 2006, and 2011 looks to beanother banner year for US exporters, particularly after a Chinese delega‐tion signed more agreements on January 21 with leading US traders. On the supply side, recent flooding in Australia is stoking fears that the coun‐try's crop will come up short, and heavy rains are also casting doubt overharvests in Pakistan and India. Technically, charts are wide open, and it is not clear where this current rally will end, although the $2 mark looks tobe the next logical resistance.



CURRENCIES

EURO EURO Last: 1.3691 High: 1.3739 Low: 1.3571 1/31/2011

=

YEN YEN Last: 82.061 High: 82.257 Low: 81.78 1/31/2011

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

'1140368'1040004'09

80.00

85.00

90.00

95.00

100.00

Things seem to have stabilized for the euro over the past month, asanother close call, this time coming from a scare on Portuguese fundingrequirements, failed to translate into the meltdown that investors feared.Dodging this bullet, at least for now, enabled the currency to move high‐er, with the Euro now hovering at just over $1.37. The longer‐term chartshows a trading range of between $1.26‐$1.42 to be in place, and we ex‐pect this range to hold, at least through the first quarter of the year. Hav‐ing said that, periodic funding/bailout issues dogging the Euro have notbeen resolved. For one thing, the European Financial Stability Facility, which is administering a $600 billion rescue fund, remains a critical buyerof debt, but some claim it is too small to make much of a difference, es‐pecially if a big elephant”, like Spain, starts to wobble. More importantly,the markets have yet to see much progress on structural reforms, or for that matter, on an agreement on who exactly will absorb the next roundof credit losses. As a result, although we could see the Euro retest its2010 high of $1.42 this quarter, a sustained move above that point looksunlikely given the fact that although the “Euro patient” has been stabi‐lized, its medium‐term outlook remains guarded.

The Japanese yen was in a rather tight trading range for much of January,this coming after a very strong December. However, the currency wea‐kened slightly late in the month on the heels of a surprising downgrade of the country's bonds by S&P. The agency lowered its rating on the coun‐try’s sovereign debt to AA‐, its first downward revision in almost 10 years,and basically putting the country’s credit on par with that of China. S&Psaid that its move was predicated on the notion that Japan's debt ratioremains among the highest in the developed countries (about 200% ofGDP) and is likely to continue to rise further before peaking in the mid‐2020’s. However, there is little fear of a European‐style run, given thatmost of Japan’s debt is held internally, and remains well bid. Further‐more, and more importantly, Japan's external balance sheet is verystrong, with the country enjoying consistent surpluses and amassing a $1

STERLING STERLING Last: 1.6016 High: 1.6048 Low: 1.5823 1/31/2011

DOLLAR INDEX DOLLAR INDEX Last: 77.87 High: 78.47 Low: 77.67 1/31/2011


'1140368'1040004'09

1.35

1.40

1.45

1.50

1.55

1.60

1.65

1.70

'1140368'1040004'09

74.00

76.00

78.00

80.00

82.00

84.00

86.00

88.00

90.00

'1140368'1040004'09

trillion foreign exchange reserve, the largest after China.

Sterling strengthened for much of January, rising from the mid‐$1.50 mark to well over $1.60 before falling sharply to $1.57 late in the monthon account of a surprising fourth quarter GDP decline of ‐.5%. Expecta‐tions were calling for .4% growth in the quarter, so the number did blind‐side investors. Initially, much was made of the fact that snowy conditionslate in the period may have skewed the data, but a deeper review of thenumbers showed that this played only a minor role, and therefore, un‐derscored just how vulnerable the economy is to tipping back into reces‐sion, especially given the tax increases and the budget cuts that lie ahead.If anything, the weaker numbers will likely postpone an interest rate rise,which looked possible not too long ago given stronger third‐quarter GDPnumbers and rising prices. For the time being, and at least through theend of February, we see sterling in a $1.55 ‐$1.61 trading range, but sus‐pect it should do somewhat better over the course of 2011, as the gov‐ernment is moving in getting its fiscal house in order faster than most.

The dollar index tried to break out above the 81 area in January, as ittried to do in December, but failed to take this level out, and instead lostsubstantial ground for much of the month, currently hovering around 78.We should not be that surprised by its decline, as the relative strength inthe Euro, along with surging commodity and equity markets, have likely prompted many to leave its safety. In addition, the late‐year tax agree‐ment cobbled together between the Republicans and President Obamathat will add some $900 billion to the deficit over two years, coupled withthe President’s State of the Union address, where no spending cuts were outlined other than a five‐year spending freeze, has not been lost on in‐vestors either, and will likely keep the downward pressure on the dollarintact going into Q1. Things may change once investors get a better readas to how spending parameters are going to shape up for the next budgetgiven the massive cuts that the Republican‐controlled House is promising.If the politicians surprise us by coming up with meaningful measures, thedollar could pick up steam in the second half of the year, just as the USrecovery starts gaining more traction, forcing the Fed to perhaps tighten by year‐end 2011.


MF GLOBAL COMMODITY ROUNDUP ‐ JANUARY 2011

FINANCIALS

S&P 500 S&P 500 Last: 1286.1 High: 1287.2 Low: 1276.5 1/31/2011

10‐YEAR NOTE 10‐YEAR NOTE Last: 93.8 High: 94.5 Low: 93.6 1/31/2011

Source for chart: Bloomberg

650.00

750.00

850.00

950.00

1,050.00

1,150.00

1,250.00

1,350.00

'1140368'1040004'09

90.00

95.00

100.00

105.00

110.00

115.00

The S&P 500 continued to gain ground in January after coming off itsstrongest December in some 19 years, and is now up a staggering 91%from the March 2009 lows. There was a modest selloff in the wake of theEgyptian unrest, but markets snapped back after only one day of selling. Looking further out, earnings remain pretty decent for the fourth quarter.Although not all the reports are out yet, of the 192 S&P companies that have reported by January 28th, 73% have beaten earnings expectations,while 54% have beaten on the top line. Longer‐term, equities shouldbenefit from the fact that money is leaving the bond market, while the Fed remains committed to an easy money policy, meaning that equities could very well retain their advantage over bonds. Finally, cash on corpo‐rate balance sheets remains high, meaning that stock buybacks and ac‐quisitions will be strong for a second year running. If there are any nega‐tives out there, it is the fact that there is a great deal of bullish compla‐cency, coupled with the fact that we have yet to see any meaningful cor‐rection set in for some time apart from the short‐lived Egyptian‐induced wobble.

The sharp price decline we saw in Treasury note market over the courseof December stabilized somewhat in January, as prices settled into a very tight trading range. The late 2010 tax agreement that was agreed to andsubsequently signed into law in January, did not rattle the market much,as it was likely discounted during December's selloff when the negotia‐tions were taking place. However, the late January policy statement fromthe Fed was far more constructive, as bond investors noted the strongcommitment the central bank expressed with respect to its bond buyingprogram, reflected by the fact that none of the Fed governors dissented.Current 10‐year yields are around 3.3%, and are now down from a seven‐month peak of 3.6% reached in December. However despite the ongoingefforts of the Fed to continue to buy up bonds, we would not be sur‐prised to see yields push higher by the April/May time window on ac‐

Source for charts: Bloomberg

©2011 MF Global Ltd.

'1140368'1040004'09count of strengthening US macro data.

The information contained in this report has been taken from trade and statistical services and other sources which we believe are reliable. MF Global Inc. does not guaranteethat such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change with‐out notice. The principals of MF Global and others associated or affiliated with it may recommend or have positions which may not be consistent with the recommendationsmade. Each of these persons exercises independent judgment in trading, and readers are urged to exercise their own judgment in trading. © by MF Global Inc. (2010) 440 SLasalle Street, Chicago, Illinois, 60605.

commodities monthly roundup -- february 2011 · 2011. 2. 2. · mfglobal.com 1 institutional use...

Documents