insight: commodity demand should remain robust · 2007-08-09 · 2 insight: commodity demand should...

8 August 2007

Commodities Weekly

Walter de Wet CFA* +27 11 378 7239 [email protected] Leon Westgate +44 207 815 4090 [email protected]

• Insight (page 2): Despite recent market concerns over US demand, Standard Bank maintains the view that the commodity outlook remains intact for a number of reasons. There would have to be a major fall in world demand be-fore commodity prices tumble. Such a demand slowdown is not currently antici-pated.

• Base metals: Strikes have returned to support copper (page 4), while rising stocks put pressure on prices. As reported last week, copper concentrates remain tight. Forward buying of aluminum (page 6) continues apace despite nearby weakness. Aluminium is likely to be more sensitive than most to further moves in the financial markets. Nickel (page 8) is drifting as stainless steel cutbacks hurt demand. In the near term, rising stocks should maintain down-ward pressure on prices. Falling zinc (page 10) stocks are still being ignored by the market. Strike action has lent some support to prices, although zinc is still looking for direction.

• Precious metals: Gold (page 14) remains under the influence of major global market uncertainty, with the yellow metal unable to find sufficient upward momentum to catapult it to higher levels. From a fundamental perspective, dol-lar weakness is still anticipated, but for now we also see little change in the high level of risk aversion, which should increase demand for US bonds and support the US dollar in the interim. Some calm returned to the platinum market (page 16) this week after a flurry of selling last week. Apart from Anglo Platinum’s announcement last week that it would miss output targets by as much as 10%, the US platinum producer, Stillwater Mining Co, reduced output estimates by 9% on Monday. Global risk aversion continues to dominate market sentiment.

• Energy: WTI crude (page 18) prices experienced a large sell-off after the highs of last week. It was trading at US$72.42 on Wednesday morning, down more than US$6/barrel from a week ago. The market has seen a massive build- up of long speculative positions on WTI over the past few weeks. This build-up of long positions did create the potential for a sharp decline in crude prices. We believe demand should continue to provide support for crude despite fears of a US slowdown.

Insight: Commodity demand should remain robust

2

Insight: Commodity demand should remain robust

Over the past few weeks, global markets have been in turmoil, trying to come to grips with the US economy and whether it would slow down more than anticipated due to housing market corrections. On the back of the sub-prime credit woes, equity markets experienced a major sell-off because of a capital flight to safer havens. A temporary resting place for much of these funds were found in US government bonds. This resulted in lower long-term yields as well as a strengthening in the US dol-lar. In conjunction with all the uncertainty, and despite decent Q2 GDP growth figures, the US economy delivered a poor perform-ance as far as job creation was concerned, creating 50,000 fewer jobs than expected in June. These uncertainties and capi-tal flight also affected commodity markets. It resulted in a major liquidation of long positions in the crude market as investors feared a slowdown in global demand. It also sparked a tempo-rary sell-off in base metals while precious metals drifted direc-tionless while the market decided whether global growth would indeed slow. Despite recent market concerns over US demand, Standard Bank maintains the view that the commodity outlook in general remains intact. This view is founded in a number of reasons:

Firstly, although the US economy is likely to return slower growth over H2 2007, the growth is likely to be well within posi-tive territory. This view was also reflected in the Fed’s policy statement on Tuesday afternoon which stated that “the down-side risks to growth have increased somewhat.” This “somewhat higher” risk was definitely not seen as enough to warrant a move away from its hawkish stance on inflation in favour of economic growth. It appears as if the exposure to housing market correc-tion and the sub-prime loan defaults in the US are likely to affect certain households, individuals and Funds (even abroad). But the risk appears to be well diversified, and losses contained. The fact is that we still expect positive growth which implies that, at an aggregate level, new wealth will be created. And new wealth implies additional demand, although at a slower growth rate.

Secondly, China’s high economic and industrial production growth is expected to compensate for most of the “lost demand” in the US due to slower growth. This is especially the case for base metals and, to a lesser extent, energy. Asia, and China specifically, has taken over from the US as the major consumer of base metals. For example, it is estimated that almost 50% of copper is consumed in Asia (most of it in China), followed by the EU with 22%, then the US and the rest of the world with 14% each. China also holds the number one position in terms of con-sumption of aluminium, lead, nickel zinc and tin. Energy prices should also remain high, although they are more dependent on US growth than base metals. The US is still by far the largest crude oil consumer, with 25% of crude consumed by it. This

WTI crude was one of the victims of global market jitters

Source: Bloomberg

Cu consumption — China top consumer of base metals

Source: ICSG

Growth in crude oil consumption — China in the lead

Sources: OPEC

71

73

75

77

79

27-Jul-07 30-Jul-07 02-Aug-07 05-Aug-07

USD/barrel

Rest of the w or ld, 14%

China, 20%

United States ,

14%

Rest of Asia, 30%

Rest of the w orld, 14%

US, 0.2

Rest of the w orld, 0.8

China, 0.5

0

0.4

0.8

1.2

1.6

Additional demand in 2008

mb/d

3

Insight: (continued)

makes crude more dependent on what happens in US markets. However, it is also estimated that China will account for one third of new world crude demand in 2008 and is likely to increase this share in subsequent years. That means that although China is still far behind the US in terms of absolute levels of crude con-sumption, it will compete fiercely for additional marginal supply.

Of course, the argument stands that a possible US economic slowdown will slow growth in other regions. We do not dispute this argument, but we do believe that the spill-over effects will be minimal, and major contagion unlikely. Traditionally, the trans-mission of real economic contagion takes place via trade links. When comparing China’s trading partners, the EU comes out on top, with the highest bilateral trade with China. The bilateral trade between China and the EU accounted for 15.5% of the national total. However, the US is China's biggest export market. Total exports to the US accounted for 21% of China’s total ex-ports in 2006. Japan was China's third-biggest trading partner. However, currently it does appear as if the EU and Japan’s growth outlook remains intact despite developments in the US economy. Growth prospects in Germany, which is the engine of the EU economy, still remains positive, as indicated by the latest industrial production figures which showed a 5.1% increase in June. Despite a recent slowdown in economic growth, Japan’s growth outlook also remains upbeat, especially towards the end of 2007. Other major Asian economies like South Korea are also still growing at levels well above 4%. Therefore, even if exports to the US decline somewhat, it is likely to be offset by trade with major trading partners such as the EU and Japan.

Lastly, the fact that many commodity markets remain tight, with supply barely keeping up with demand (indicated by the low levels of stock and low excess production capacity compared to previous years) is evidence of buoyant global growth. Also, com-modity demand tends to be price inelastic, and substitution, if at all possible, only takes place at very high price levels. Given the development stage of many developing countries, where a major focus is on infrastructure investment, base metals and energy are essential, ensuring that demand will stay higher for longer, even at higher prices. There would have to be a major fall in world demand before commodity prices tumble. Such a demand slowdown is not currently anticipated.

Despite recent market concerns over US demand, Standard Bank maintains the view that commodity outlook in general re-mains intact due to a number of reasons. There would have to be a major fall in world demand before commodity prices tumble to low levels. Such a slowdown in demand is not currently antici-pated.

Chinese trading partners — IP growth remains robust

Source: Bloomberg

-2

3

8

13

18

Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07

% (y/y)

Germany Japan South Korea

4

Copper

Copper started last week in good spirits before running out of steam mid-week and succumbing to sub-prime jitters by Friday. The overspill of US sub-prime woes into metals had a devastat-ing effect, albeit short-term. Thursday saw copper close at $7,875/mt, up $115 from the previous week’s close. However, Friday saw prices close at $7,670/mt, down $205 on Thursday and down $90 on the week. This week has seen copper stabilize and recover like much of the complex, with copper closing at $7,750/mt on Tuesday.

Strike action has resurfaced to support prices. The Cananea mine in Mexico is reportedly paralyzed, with strike action enter-ing its second week. The strike, reportedly due to safety issues and a new labour contract, has been declared illegal by a Mexi-can court – although the union is likely to appeal the decision. The mine produces both concentrate and SX-EW cathode, with production last year coming in at 111kt of contained copper and 52.5kt of cathode. Meanwhile, talks between management and unions at Southern Copper Corp’s Peruvian operations are near-ing the deadline, with the union threatening to ballot for strike action if no agreement has been met on the 8th of August.

This week has seen the expected announcement of lower pro-duction from the Collahuasi mine in Chile and also lower produc-tion from Zambia. Production at Collahuasi was 160,000mt dur-ing H1 2007, 21,000mt down from the same period last year. The fall was due to the replacement of a motor at one of the mills. Meanwhile, Zambian copper production fell 13.3% year-on-year, to 229,102mt during H1 2007. Production was affected by a heavier than usual rainy season.

The Chinese smelter purchase team has specified the level of their proposed cutbacks at 10% – 15%. Furthermore, the group has stated that it would not accept material for TC/RCs of less than $50/mt and 5¢/lb. However, we believe these cutbacks will be for “targeted” production levels rather than real production, and will likely result in delays to expansion projects as well as some older (i.e. more expensive smelting capacity) being closed. Meanwhile, the Chinese investigation into misreporting of scrap grades is still ongoing, with material lying fallow in ports.

LME stocks closed on Friday at 105,650mt, up 2,850mt from last week as a negative Shanghai-LME arbitrage saw deliveries to China diverted to Asian warehouses. Last week saw SHFE stocks rose by 1,474mt, to 91,563mt.

Strikes return to support copper, while rising stocks put pressure on prices. Concentrates remain very tight.

Copper stock

Sources: LME, SFE, Standard Bank Group

Relative performance to the complex

Sources: LME, Standard Bank Group

Price movement


4,000

5,250

6,500

7,750

9,000

Jun-06 Sep-06 Dec-06 Mar-07 Jun-07

USD/tonne

Cash price 100-day MA 200-day MA

40

100

160

220

280

Jun-06 Aug-06 Nov-06 Jan-07 Apr-07 Jun-07

Thousands of tonnes

2

3

4

5

6Days

Shanghai Futures ExchangeLME Days consumption

USD 7,286

R2 = 0.60

5,300

6,100

6,900

7,700

8,500

3,800 4,075 4,350 4,625LMEX Index ex copper price movements

USD/tonne

Implied copper price

5

Copper: (continued)

Standard Bank copper market conditions indicator

Source: Standard Bank Group

Forward curve

Sources: LME, Bloomberg, Standard Bank Group

Copper consumers’ price


Volatility vs. stock levels


ATM implied volatility


Speculative positions (COMEX)

Sources: COMEX, Standard Bank Group

R2 = 0.30

24

33

42

51

60

85,000 121,250 157,500 193,750 230,000

LME stock (tonnes)

Implied vol

Current ATM implied vol for 3-month contract

Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-072,500

4,125

5,750

7,375

9,000USD/tonne

Under valued Over valued Spot price

10

25

40

55

70

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

%

Current volatility 1 year avg. 95% c.i.

100

110

120

130

140

Mar-07 Apr-07 Apr-07 May-07 Jun-07 Jun-07 Jul-07

Index

Copper price for refined copper consumersUSD copper price

-30,000

-15,000

15,000

30,000

Oct-06 Dec-06 Mar-07 May-07 Jul-07

Contracts

Long non-commercial Short non-commercialNet position

5,000

5,875

6,750

7,625

8,500

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

USD/tonne

Current 90 day average5 days ago 1 year average

6

Aluminium

After trending sideways for much of last week, aluminium was particularly affected by sub-prime jitters and stock market falls on Friday, closing the week at $2,645/mt, down $115 from the previous week. Aluminium has stabilized so far this week but has failed to recover Friday’s losses. Aluminium closed at $2,664/mt on Tuesday.

Aluminium has the highest correlation of the base metals to the S&P 500 index. Going forward, in the absence of clear direction during the summer period, aluminium will likely be more sensi-tive to moves in financial markets than the rest of the complex.

As aluminium nearby forwards took a beating during recent price falls, the far forwards were bought up – again. Between August 1st and August 3rd, the December 2011 contract rose dramatically, from $2,335/mt to $2,434/mt, while the 63-month contract, October 2012, increased $112 to $2,359/mt. In con-trast, the 3-month contract fell by $97 in the same three-day period.

Fresh from its acquisition of Alcan, Rio Tinto has signed an agreement for the proposed development of a new aluminium smelter in Malaysia. The smelter, located in Similajau, in the state of Sarawak, will have an initial capacity of 550,000tpy, with potential to expand to 1.5 million tpy. First production is penciled in for Q4 2010, with power for their project coming from a new hydro-electric project in the area which is currently under con-struction.

Meanwhile, the current investigation by Chinese authorities into copper scrap has reportedly spilled over into aluminium scrap. Some orders have been detained, and other orders cancelled, while the investigation goes on. The full impact is far from clear, though the southern-Chinese port of Guandong appears to be the focus of the investigation.

Aluminium stocks continued to increase last week, climbing 2,650mt to close on Friday at 837,925mt. Stocks have since fallen back, to 836,350mt on Tuesday.

Forward buying continues at pace despite nearby weakness. Aluminium is likely to be more sensitive than most to further moves in the financial markets.

Reportable aluminium stock

Sources: LME, IAI, Standard Bank Group



Price movement


2,000

2,300

2,600

2,900

3,200


USD/tonne


0

1,000

2,000

3,000

4,000

Jun-03 Jun-04 Jun-05 Jun-06 Jun-07

Thousands of tonnes

12

18

24

30

36Days

LME Other inventoriesDays consumption

USD 2,774

R2 = 0.32

2,500

2,625

2,750

2,875

3,000

3,600 3,875 4,150 4,425 4,700

LMEX Index ex aluminium price movements

USD/tonne

Implied aluminium price

7

Aluminium: (continued)

Standard Bank aluminium market conditions indicator


Forward curve


LME stock on warrant






Price for aluminium consumers


Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-071,500

2,000

2,500

3,000

3,500USD/tonne


R2 = 0.63

14

23

32

41

50

650,000 700,000 750,000 800,000 850,000

LME stock (tonnes)

Implied vol


40

55

70

85

100

Jan-98 Jul-00 Jan-03 Jul-05

%

-60

-8

45

98

150USD/tonne

Stock on w arrant (% of stock)Spread (cash - 3-month forw ard)

94

97

100

103

106

Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07

Index

Aluminium price for primary aluminium consumersUSD aluminium price

2,400

2,525

2,650

2,775

2,900

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

USD/tonne


10

19

28

36

45

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

%


8

Nickel

After a positive start last week, nickel faded as the week wore on, falling below the $30,000/mt level. Nickel handled Friday’s panic better than most, but closed the week at $29,200/mt, down $1,250 from the previous week’s close. So far this week, nickel has been stable, closing at $28,900/mt on Tuesday.

In fairly thin trading conditions, nickel has been lacking direction. Steadily increasing LME inventories have continued to depress prices. LME stocks increased 1,452mt over last week, to close at 15,138mt on Friday. Inventories have continued to pick up this week, with stocks climbing a further 1,536mt, to close at 16,674mt on Tuesday.

Stainless steel production cutbacks are still dominating nickel, the latest announcement coming from Japanese stainless steel-maker Nisshin Seiko that is planning to cut production of chrome and nickel stainless steel by 30% in August and September. The move is aimed at reducing steel inventory, however, the side affect has been a significant, albeit temporary, drop in nickel demand this summer.

Some support for prices has come from Aneka Tambang after the Indonesian ferronickel producer suffered a leak from its No 3 smelter in mid-July. In the wake of the accident, the company has cut its production forecast from 20,000mt to 16,000mt. The cut, while significant, has been outweighed by increasing LME inventories. However, the impact may be felt more keenly to-wards the end of the year as stainless steel demand picks up.

The other news this week has been the firming up of the project pipeline. Xstrata is looking to make a go-ahead decision on its Koniambo project in New Caledonia in Q4 2007. The project is expected to have a production capacity of 60,000tpy, with start-up envisaged in 2011. Meanwhile, Sherritt is looking to bring its majority-owned Ambatovy project on stream in 2010. The pro-ject, located in Madagascar, is also expected to produce around 60,000tpy of nickel. Also due to start up in 2010 is Anglo-American’s Baro-Alto ferronickel project in Brazil. The engineer-ing, procurement and construction management contract has been awarded, with the project expected to start production in Q1 2010, ramping up to full 36,000tpy capacity in 2011. Mirabela Nickel expects its 16,000tpy capacity Santa Rita nickel mine to enter production during Q2 2009. The Brazilian mine will initially produce nickel in concentrates, however, the company is study-ing the potential for an on-site smelter.

Nickel is drifting as stainless steel cutbacks hurt demand. Rising stocks maintain downward pressure on prices.

LME Stock




Price movement


10,000

21,250

32,500

43,750

55,000


USD/tonne


0

9

18

27

36


Thousands of tonnes

0.5

3

5.5

8

Days

LME Days consumption

USD 39,091

R2 = 0.18

26,000

33,250

40,500

47,750

55,000

3,600 4,000 4,400LMEX Index ex nickel price movements

USD/tonne

Implied nickel price

9

Nickel: (continued)

Standard Bank nickel market conditions indicator


Forward curve








Nickel consumers’ price


Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-0710,000

21,000

32,000

43,000

54,000USD/tonne


R2 = 0.11

34

40

46

52

58

2,000 8,000 14,000 20,000LME stock (tonnes)

Implied vol


22,000

29,500

37,000

44,500

52,000

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

USD/tonne


20

30

40

50

60

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

%


0

25

50

75

100

Jan-98 May-00 Oct-02 Feb-05 Jul-07

%

-1,000

1,000

3,000

5,000

7,000USD/tonne


60

75

90

105

120

Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07

Index

Nickel price for refined nickel consumersUSD nickel price

10

Zinc

Zinc drifted sideways during the first part of last week, however, Friday’s sell-off saw prices drop sharply, to close the week at $3,365/mt, down $110 from the previous week’s close. Zinc was steady on Monday this week, before rising strongly on Tuesday to close at $3,380/mt. Zinc has been supported by strike action and falling stocks.

Zinc stocks continue to decline in August, following a 9.3% fall in July. Zinc LME stocks finished last week at 65,825mt, down 1,675mt from the previous week. LME stocks have continued to fall this week, with stocks falling a further 1,475mt to close at 64,350mt on Tuesday.

A wildcat strike at Exxaro’s Rosh Pinah zinc-lead mine in Na-mibia lent some support to the price, with the strike continuing over the weekend. Production at Exxaro’s Zincor smelter has been unaffected so far, with the facility using on-site stocks.

Elsewhere, Grupo Mexico’s Minera Zacatecas and its Minera Taxco polymetallic mine have been reportedly been hit by the same strike action that has affected the Cananea Copper mine. The action is due to alleged dangerous working conditions and due to the fact that collective contracts which expired last year have not yet been renewed.

Although zinc prices tend to copy moves in copper prices, the concentrates market is the exact mirror image. While spot TCs for copper are around $30/mt, spot charges for zinc concen-trates in Europe are reportedly around $300/mt, with some deals early in the summer reportedly going above $300/mt. The pic-ture is not quite as rosy for zinc smelters across the board; Euro-pean figures serve to demonstrate the sharp turnaround in the concentrates market, which saw spot TC’s of a mere ~$30/mt only a year ago.

Mine production continues to increase, while the project pipeline is well stocked. Also, Aur Resources continues to ramp up pro-duction from its Duck Pond mine in Newfoundland. The mine entered commercial production in April this year. Q2 production was 5.4kt of zinc in concentrates with production forecast to be around 21.3kt this year. Full production capacity will be around 34.5ktpy of zinc in concentrates. Meanwhile, Yemen has ap-proved the development of the $176 million Jabali mine. Produc-tion capacity is expected to be around 70ktpy of zinc oxide, with production due in mid-2009.

Falling zinc stocks are still being ignored by the market. Strike action has lent some support to prices, though zinc is still look-ing for direction.

Zinc stock

Sources: LME, SFE, Standard Bank Group



Price movement


1,500

2,375

3,250

4,125

5,000


USD/tonne


40

100

160

220

280


Thousands of tonnes

2.2

3.9

5.6

7.3

9Days

Shanghai Futures ExchangeLME Days consumption

USD 3,566

R2 = 0.54

2,900

3,200

3,500

3,800

4,100

3,600 4,000 4,400LMEX Index ex zinc price movements

USD/tonne

Implied zinc price

11

Zinc: (continued)

Standard Bank zinc market conditions indicator


Forward curve








Zinc consumers’ price


Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07500

1,625

2,750

3,875

5,000USD/tonne


R2 = 0.78

26

36

46

56

66

60,000 110,000 160,000 210,000 260,000

LME stock (tonnes)

Implied vol


2,500

2,875

3,250

3,625

4,000

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

USD/tonne


16

27

38

49

60

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

%


0

25

50

75

100


%

-50

0

50

100

150USD/tonne


80

90

100

110

120

Jan-07 Jan-07 Feb-07 Mar-07 Apr-07 Apr-07 May-07

Index

Zinc price for zinc consumers US zinc price

12

Lead

Price movement


Lead stock




Forward curve






800

1,450

2,100

2,750

3,400


USD/tonne


1,200

1,750

2,300

2,850

3,400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Months forw ard

USD/tonne


20

45

70

95

120

Jun-06 Sep-06 Nov-06 Feb-07 Apr-07 Jul-07

Thousands of tonnes

0.5

3

5.5

8

Days


R2 = 0.17

35

39

43

47

51

20,000 45,000 70,000 95,000 120,000LME stock (tonnes)

Implied vol


0

25

50

75

100


%

-50

0

50

100

150USD/tonne


16

26

36

46

1 2 3 4 5 6 7 8 9 10 11 12 13 14Months forw ard

%


13

Tin

Price movement


Tin stock




Forward curve






6,000

8,750

11,500

14,250

17,000


USD/tonne


10,000

11,750

13,500

15,250

17,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Months forw ard

USD/tonne


4

8

12

16

Jun-06 Sep-06 Nov-06 Feb-07 Apr-07 Jul-07

Thousands of tonnes

6

8

10

12

14Days


R2 = 0.05

22

27

32

37

42

7,500 9,500 11,500 13,500

LME stock (tonnes)

Implied vol


0

25

50

75

100


%

-100

125

350

575

800USD/tonne


16

24

32

40

48

1 2 3 4 5 6 7 8 9 10 11 12 13 14Months forw ard

%


14

Gold

Gold remains under the influence of major global market uncer-tainty, with the yellow metal unable to find sufficient upward mo-mentum to catapult it to higher levels. That said, it also appears to provide good resistance against any major negative news at a time when volatility has increased in many other commodity markets. Gold recovered some lost ground over the past week. It was bid at US$671/oz at close in New York, up almost US$5 from last week Wednesday.

It was a quiet week for gold, with most market participants adopting a wait and see approach as they awaited the US Fed interest rate decision. In the end, the statement delivered no surprises. The Fed continues its hawkish stance on inflation despite the fact that “the downside risks to growth have in-creased somewhat.” This “somewhat higher” risk was definitely not seen as enough to warrant a move away from its current hawkish stance on inflation. The fact that there remains concern surrounding inflation should be bullish for gold, at least in the medium term. However, as pointed out last week, core inflation in the US has been on a very slow but steady decline. Although we do not expect a rate cut from the Fed this year, it certainly increases the possibility of a rate cut early next year which should support further dollar depreciation.

The crude oil market experienced a major sell-off this week, with WTO shedding almost US$6/barrel on fears of slowing global demand. Although this fall in crude prices are positive for higher growth and lower inflation, prices remain firmly above US$70/barrel which in itself is still high and should remain an inflation concern.

Some central bank selling of gold is also taking place in the mar-ket. The amounts sold are little and should easily be absorbed. The Bank of Spain reduced their gold reserves by another 25 tonnes (800,000 oz) during July.

Dollar weakness from a fundamental perspective is still antici-pated. But for now, we also see little change in the high level of risk aversion, which should increase demand for US bonds and support the US dollar in the interim.

From a technical perspective, resistance levels are at US$679.30 and support at US$660.20.

Gold remains under the influence of major global market uncer-tainty, with the yellow metal unable to find sufficient upward mo-mentum to catapult it to higher levels. From a fundamental per-spective, dollar weakness is still anticipated. But for now, we also see little change in the high level of risk aversion, which should increase demand for US bonds and support the US dollar in the interim.

Gold price and US dollar movements

Sources: Bloomberg, Standard Bank Group

Speculative positions (COMEX)


Price movement


-250

-125

0

125

250

Jan-07 Mar-07 May-07 Aug-07

Thousands of contracts

Long Short Net

1.32

1.345

1.37

1.395

1.42

Nov-05 Apr-06 Sep-06 Feb-07 Jul-07

USD/EUR

600

625

650

675

700USD/oz

US dollar per Euro Gold spot price

450

525

600

675

750


USD/oz


15

Gold: (continued)

Standard Bank gold market conditions indicator


Gold lease rates (spread over LIBOR)

Sources: LBMA, Standard Bank Group

Gold vs. USD


Gold price for gold fabricators




Gold vs. base metals



465

550

635

720USD/oz


94

98

102

106

110

Mar-07 Apr-07 May-07 May-07 Jun-07 Jul-07

Index

Gold price for gold fabricators USD gold price

0.04

0.10

0.16

0.22

0.28

1 Month 3 months 6 months 12 months

%

Current 1 Month ago 6 months ago

USD695

420

500

580

660

740

1.15 1.2 1.25 1.3 1.35 1.4USD/EUR

USD/oz

Implied gold price Linear (Series1)

USD652

420

500

580

660

740

1,500 2,375 3,250 4,125 5,000LMEX Index

USD/oz

Implied gold price Linear (Series1)

8

14

20

26

32

1 m

onth

2 m

onth

3 m

onth

6 m

onth

1 ye

ar

2 ye

ar

3 ye

ar

4 ye

ar

5 ye

ar

%


16

Platinum group metals

Some calm returned to the platinum market this week after a flurry of selling last week. Platinum was bid at US$1,282 at close in New York on Tuesday, slightly down from the level one week ago. Palladium was bid at US$660/oz at close during the same session.

Like the gold market, platinum remained quiet as investors sat on the sidelines in anticipation of the US Fed rate decision. We still expect platinum to find it difficult to consolidate at higher levels, since it is linked to the fortunes of gold. This will continue as long as risk aversion continues to dominate market senti-ment.

Despite market fears of a global economic slowdown, which should affect demand for PGM’s negatively, platinum continues to find support from more news that platinum production targets will not be met in 2007. Apart from Anglo Platinum’s announce-ment last week that they would miss output targets by as much as 10%, the US platinum producer, Stillwater Mining Co, re-duced its output estimates by 9% on Monday.

Data out of Germany on Tuesday indicated that industrial pro-duction in Europe’s largest economy, grew by 5.1% y/y in June, following industrial production growth of 4.6% in May. All indica-tions are that, although some slowdown in the Euro zone is ex-pected, growth will remain robust. Europe is the world’s largest consumer of platinum.

Some downside risk might prevail during the week in the PGM market as reports are starting to filter through that the wage ne-gotiations that have been persisting at several mines across South Africa during the past few weeks might finally draw to a close. Impala Platinum, the world’s second-largest platinum pro-ducer, signed a wage agreement with its workers on Tuesday.

From a technical perspective, current support is at US$1,260 for platinum, with strong resistance at US$1,321.00. Palladium sees support at US$355, and resistance at US$370.

Some calm returned to the platinum market this week after a flurry of selling last week. Platinum was bid at US$1,282 at close in New York on Tuesday, slightly down from the level one week ago. Apart from Anglo Platinum’s announcement last week that it would miss output targets by as much as 10%, the US plati-num producer, Stillwater Mining Co, reduced output estimates by 9% on Monday. Global risk aversion continues to dominate market sentiment.

Palladium price movement


Spread (Platinum - Palladium)


Platinum price movement


900

1,025

1,150

1,275

1,400


USD/tonne


280

310

340

370

400

Oct-06 Jan-07 Apr-07 Jul-07

USD/oz


640

730

820

910

1,000

Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07

USD/oz

Actual 5 day avg.30 day avg. 250 day avg.95% c.i.

17

Platinum group metals: (continued)

Standard Bank platinum market conditions indicator


Platinum speculative positions (COMEX)


Platinum vs. gold


Standard Bank palladium market conditions indicator


Palladium speculative positions (COMEX)


Platinum vs. base metals



225

275

325

375

425USD/oz

Under priced Over priced Spot price


900

1,050

1,200

1,350USD/oz


-12

-6

0

6

12



Long Short Net

-15

-8

0

8

15



Long Short Net

USD1,270

800

1,015

1,231

1,446

400 485 570 655 740Gold price (USD/oz)

USD/oz

Implied platinum price Linear (Series1)

USD1,237

800

945

1,090

1,235

1,380

1500 2375 3250 4125 5000LMEX Index

USD/oz

Implied platinum price Linear (Series1)

18

Energy — Crude oil

WTI crude prices experienced a large sell-off after the highs of last week. It was trading at US$72.42 on Wednesday morning, down more than US$6/barrel from a week ago. Brent prices de-clined, trading at US$71.39 on Wednesday morning. Although both WTI and Brent crudes have seen a large fall in prices, it remains well bid above the US$70/barrel level.

The market has seen a massive build-up of long speculative positions on WTI over the past few weeks. This build-up of long positions did create the potential for a sharp decline in crude prices. The fear that global demand might decline created the catalyst for this sell-off. Given the high level of speculative posi-tions, and increased global market risk aversion, a greater shake-out cannot be ruled out. Also, given that the US is by far the largest consumer of crude oil, the uncertainty regarding the US economic outlook will continue to create volatility in the mar-ket. However, despite this sell-off, we remain of the opinion that global commodity markets remain supportive of crude prices.

Looking at US refinery capacity, utilization is still on the in-crease, with current capacity at 93.6%. The result is more nor-mal gasoline crack spreads that should stay in line with the aver-age spreads seen in the past. This should also increase pres-sure on crude stock levels. The current major risk to the high refinery capacity is the hurricane season that extends into Octo-ber. Despite the fact that this risk would be priced into the mar-ket already, should a major storm disrupt refineries in the US, spreads are likely to spike again.

As mentioned above, with the refined market pressures lifted, the market focus is once again on crude demand and supply. We do believe that as long as OPEC doesn’t increase produc-tion, the curve should stay in backwardation. With the current high runs from refineries, crude inventories are drawn down, placing a premium on near-term contracts. As stated above, we are of the opinion that demand will continue to provide support for crude despite fears of a US slowdown. We also continue to see good growth in Asia and Europe, which should provide fur-ther support to the upside.

WTI crude prices experienced a large sell-off after the highs of last week. WTI was trading at US$72.42 on Wednesday morn-ing, down more than US$6/barrel from a week ago. The market has seen a massive build-up of long speculative positions on WTI over the past few weeks. This build-up of long positions did create the potential for a sharp decline in crude prices. We are of the opinion that demand will continue to provide support for crude despite fears of a US slowdown. We also continue to see good growth in Asia and Europe, which should provide further support to the upside.

US crude oil stock


Weeks worth of US crude stock


Price movement


56

62

68

74

80

Mar-07 Apr-07 May-07 Jun-07 Jul-07

USD/barrel

WTI spot Brent spot100-day MA (WTI) 200-day MA (WTI)

240

270

300

330

360

Aug-97 Dec-99 Mar-02 Jul-04 Oct-06

Millions bbls

10

30

50

70

90USD/bbl

US crude stock 10 year avg. US stockWTI spot

18

20

22

24

26

Sep-06 Dec-06 Mar-07 Jul-07

Weeks

Weeks of stock 10-year avg. w eeks of stock

19

Energy — WTI crude

Standard Bank WTI market conditions indicator


WTI ATM implied volatility


WTI Forward curve


Spread (WTI crude — Brent crude)


Spread (WTI crude — NY Gasoline)


US refined stock

Sources: DOE, API, Standard Bank Group


45

60

75

90USD/barrel

Under priced Over priced Spot price

-8

-5

-2

1

4

Jun-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07

USD/barrel


18

25

32

39

46

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

%


0

10

20

30

40

Jun-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07

USD/barrel


64

68

72

76

80

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

USD/barrel


160

220

280

340

400

Jul-05 Nov-05 Apr-06 Aug-06 Jan-07 Jun-07

Thousands of barrels

2

7

12

17

22USD/barrel

US motor gasoline stock US distillate fuel stockWTI/NY gasoline spread

20

Energy — US natural gas

US natural gas spot price


US natural gas net imports

Sources: DOE, Standard Bank Group

Natural gas forward curve


Residual fuel equivalent price of natural gas


US power generation


US natural gas storage


5

6

7

8

9

Mar-07 Apr-07 May-07 Jun-07 Jul-07

US$/MMBtu

Henry Hub spot 100-day MA 200-day MA

4

6

7

9

10

Jun-06 Aug-06 Oct-06 Jan-07 Mar-07 Jun-07

US$/MMBtu

Implied price (burner-tip parity No.6 residual fuel)Natural gas price (1st generic future)

210

250

290

330

370

Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07

Cft (bn)

US net imports of natural gas

0

105,000

210,000

315,000

420,000

Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07

MWh

US pow er generation (other sources)US pow er generation from natural gas

6

7

8

9

10

1 3 5 7 9 11 13 15 17 19 21 23Months forw ard

US$/MMBtu

Current 5 days ago 30 days ago

500

1,250

2,000

2,750

3,500

Jun-02 Aug-03 Oct-04 Nov-05 Jan-07

Cft (bn)

Natural Gas in storage 5 year avg.

21

Equity performance

PGM stocks/platinum price


Energy stocks/energy BTU equivalent


Diversified base metals mining stocks/LMEX Index


Gold stock/gold price


Aluminium stocks/aluminium prices


82

107

132

157

182

Aug-06 Oct-06 Dec-06 Feb-07 Mar-07 May-07 Jul-07

Index

Anglo Plats Impala PlatinumLonmin Northam

64

79

94

109

124


Index

Barrick New montGold Corp Anglo Gold

88

105

122

139

156


Index

Exxon-Mobil BPRoyal Dutch Shell Total SAChevron Texaco

71

104

137

170

203


Index

Alcoa Alcan

76

102

128

154

180

206


Index

CVRD Xstata

22

Additional Information/Figure explanations

• Standard Bank market conditions indicator

The indicator is based on factors that affects demand for a relevant commodity. Standard multivariate regression analysis is applied to determine a fundamental price for the commodity. The probability of further deviations is determined using historical deviations of the actual price from the estimated fundamental price. When the relevant commodity price falls below the historic 15th percentile of the difference between the actual and fundamental price, the commodity is classified as undervalued. When the commodity price rises above the 85th percentile it is classified as undervalued. The indicators thus show when the spot (cash) price of a commodity is overvalued or undervalued it is due for a correction based on historical probabilities. When the figure shows neither overvalued or undervalued, it implies the commodity is fairly priced based on the estimated fundamental price and prevailing market conditions. The indicator is updated during the first week of each month.

• Base metal figures

− Relative performance to the complex

The figure measures the performance of a metal relative to the movement of the rest of the complex. The metal’s performance is measured relative to the LMEX index and the index captures the performance of copper, aluminium, nickel, zinc, lead and tin on the LME. The metal’s contribution to the LMEX index is excluded (using standard regression analysis and simulation) from this index to prevent the metal’s own movement from explaining itself. Based in this relationship, an implied value for the metal is calculated. Although each base metal is affected by its own supply and demand factors, in the short run it often happens that the complex moves in unison. Moreover, from a demand perspective most base metals are affected by similar macroeconomic fundamen-tals and one can expect them to react in a similar fashion to economic news.

− Volatility vs. stock levels

The figure plots the ATM implied volatility for the three-month LME contract relative to stock levels in LME warehouses. The figure also provides a polynomial regression line of this relationship, which indicates the historic relationship between volatility and LME stock. The figure therefore is indicative of whether current volatility is high or low compared to the historic relation-ship. For these figures the last 300 daily observations are used.

− ATM implied volatility

The figure provides ATM implied volatility for forward contracts. The figure also provides a 95% confidence interval (c.i.), which is calculated using the historic probability distribution of the volatility based on daily data over the past 600 days.

− LME stock on warrant

A warrant allows the carrier of the warrant to take physical delivery of the metal from an LME warehouse. A high percentage of total stock on warrant signals high turnover or metal availability to the market. When the percent of stock on warrant declines (and the percent of cancelled warrants increases), it signals less metal availability in the market. In general, a change in stock on warrant will result in an increase in price volatility.

23

Additional information on figures: (continued)

• Consumers’ price indicator

The consumers’ price indicator shows the weighted price of a metal in the currencies of major consumers of the metal and is weighted according to the amount that each country consumed in 2006. For comparison, the US dollar price of each metal is also given. For copper, the price of the metal in Europe, the US, UK, Russia, India, China, Thailand and Japan is used in the calculation. Together these countries consumed 77% of world refined copper in 2006. For aluminium, the price of the metal in Europe, the US, the UK, Switzerland, India, China, Japan, Russia, Thailand, Malaysia, Indonesia, Turkey, Saudi Arabia and Egypt is used in the calculation. Together these countries consumed 83% of world aluminium in 2006. For nickel, the price of the metal in Europe, the US, the UK, India, China and Japan is used in the calculation. Together these countries consumed 80% of world nickel in 2006. For zinc, the price of the metal in Europe, the US, the UK, India, China, Japan, Thailand, Malay-sia, Indonesia, and Egypt is used in the calculation. Together these countries consumed 76% of the world’s zinc in 2006.

• Precious metals figures

− Gold price for gold fabricators

The gold price for the gold fabricators index shows the weighted price of gold in the currencies of major gold fabricators. The index is weighted according to the amount of gold that each country consumed in 2006. For comparison, the US dollar price of gold is also given. In the calculation the gold price (in local currency) for Europe, Switzerland, the US, UK, Russia, India, Paki-stan, China, Japan, Egypt, Saudi Arabia, the UAE, Turkey, Malaysia, Indonesia and Thailand is used. Together these coun-tries constituted 83% of world demand for gold fabrication.


The figure provides ATM implied volatility for forward contracts. The figure also provides a 95% confidence interval (c.i.), which is calculated using the historic probability distribution of the volatility based on daily data over the past 360 days.

− Gold vs. USD/EUR

The figure plots the gold price relative to USD/EUR exchange rate and it also provides a regression line of this relationship, which indicates the linear relationship between the variables. The figure therefore indicates whether current gold price is high or low compared to the price implied by the historic relationship. For these figures, the last 90 weekly observations are used.

− Gold (platinum) vs. base metals

The figure plots the gold price (platinum price) relative to the performance of base metals (as measured by the LMEX index) and it also provides a regression line of this relationship, which indicates the linear relationship between the variables. The figure therefore indicates whether the current gold price (platinum price) is high or low compared to the price implied by the historic relationship. For these figures, the last 90 weekly observations are used.

− Platinum vs. gold

The figure plots the platinum price relative to the gold price and it also provides a regression line of this relationship, which indicates the linear relationship between the variables. The figure therefore indicates whether the current gold price is high or low compared to the price implied by the historic relationship. For these figures, the last 90 weekly observations are used.

− Platinum/Palladium spread

The figure provides spot price spread between platinum and palladium and it also provides a 95% confidence interval (c.i.) which is calculated using the historic probability distribution of the volatility based on daily data over the past 500 days.

24

Additional information on figures: (continued)

• Energy figures


The figure provides ATM implied volatility for forward contracts and it also provides a 95% confidence interval (c.i.), which is calculated using the historic probability distribution of the volatility based on daily data over the past 360 days.


The figure provides the price for forward contracts. It also provides a 95% confidence interval (c.i.), which is calculated using the historic probability distribution of the volatility based on daily data over the past 500 days.

− Spreads: WTI/Brent and WTI/NY Gasoline

The figure provides spot price spread between the applicable variables. It also provides a 95% confidence interval (c.i.), which is calculated using the historic probability distribution of the volatility based on daily data over the past 500 days.

• Equity performance figures

The figures provide the performance of equities after accounting for the performance of the underlying commodities that a company mines. A rise in the stock price of a company in the graph shows the company managed to outperform (during the period under display) the underlying commodity. Put differently, after accounting for commodity price movements, the manage-ment of the company managed to add additional value to shareholder’s wealth. The figures are calculated as follows:

• Energy stock: Company stock/(BTU equivalent price of crude + price of natural gas);

• Aluminium, platinum and gold mining stocks: Company stock/price of the underlying commodity;

• Diversified base metals mining stock: Company stock/LMEX Index.

25

Research Strategy

Robert J Van Eyden — Global Head [email protected] +27-11-378-7242

CEEMEA

Francis Beddington Head — Local and Sovereign Strategy [email protected] +44-20-7815-2706

Stephen Bailey-Smith Local and Sovereign Strategy [email protected] +44-20-7815-3671

Henry Flint Local and Sovereign Strategy [email protected] +27-11-378-7202

Dmitry Shishkin Relative Value Strategy [email protected] +44-20-7815-3181

Phumelele Mbiyo Local and Sovereign Strategy [email protected] +27-11-378-7236

CIS

Omega Hatfield Head — Credit and Securitisation [email protected] +7-495-783-3833

Roman Luchkovsky Credit and Securitisation [email protected] +7-495-783-3861

LatAm

Ruth Mazzoni Head — Credit and Securitisation [email protected] +1-212-407-5033

Jose Bernal Credit and Securitisation [email protected] +1-212-407-5056

Eva Costa Credit and Securitisation [email protected] +1-212-407-5090

Larry Krohn Head — Latin American Economic Strategy [email protected] +1-212-407-5042

South Africa

Henry Flint Deputy Head [email protected] +27-11-378-7202

Jason Costa Unit Head — Credit and Securitisation [email protected] +27-11-378-7220

Walter de Wet Senior Analyst [email protected] +27-11-378-8628

Adriaan du Toit Analyst [email protected] +27-11-378-7215

Moxima Gama Technical Analysis (Equities) [email protected] +27-11-378-7235

Darran Grabham Technical Analyst [email protected] +27-11-378-7228

Michael Keenan Local Markets Strategy [email protected] +27-11-378-7246

Raven Moodley Credit and Securitisation [email protected] +27-11-378-7222

Nhlanhla Ntuli Quantitative Strategy [email protected] +27-11-378-7229

Ayanda Olifant Analyst [email protected] +27-11-378-7223

Nicolette Roussos Quantitative Strategy [email protected] +27-11-378-7217

Seamus Vasey Local Markets Strategy [email protected] +27-11-378-7213

Leon Westgate Commodities Analyst [email protected] +(44) 207 815 4090

26

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insight: commodity demand should remain robust · 2007-08-09 · 2 insight: commodity demand should...

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