vm group_abn amro commodity week #25

8/6/2019 VM Group_ABN AMRO Commodity Week #25

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Contents

Commodity price moves

Crude oil: IEA turns political

Asian central bankers: tough choices ahead

Gold and silver: China churns out coins

Fertiliser: urea nears 2008 highs

Cocoa: Ivory Coast lowers export standards

Charts

Price moves so far this year

Commodity Week

Week #25:20-24 June 2011

VM Group research for ABN AMRO

Tel: +44 207 569 5930

E-mail: [email protected]


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Commodity Price MovementsCommodity Price 24-Jun

Aluminium 2,498 $/tonne (2%) (1%) 24% Cobalt 35,000 $/tonne (2%) (8%) n/a Copper 9,055 $/tonne (1%) 2% 33%

Lead 2,561 $/tonne 3% 3% 39% Nickel 22,000 $/tonne 0% (3%) 8% Steel (Med) 565 $/tonne 0% 4% 35% Tin 24,905 $/tonne (1%) (7%) 37% Zinc 2,253 $/tonne 1% 4% 20%

Gold 1,515 $/oz (1%) (1%) 20% Palladium 739 $/oz (2%) 0% 54% Platinum 1,696 $/oz (3%) (4%) 7% Rhodium 2,000 $/oz 4% 4% (16%) Silver 34.73 $/oz (2%) (3%) 82%

Arabica coffee 251 c/pound (1%) (5%) 49% Cocoa, ICE 2,964 $/tonne 2% 2% (6%) Cocoa, LIFFE 3,002 $/tonne 1% 2% (19%) Corn 657 c/bushel (4%) (7%) 92% Cotton 127 c/pound (2%) (8%) 59%

FCOJ 199 c/pound 10%

9%

40%

Feeder cattle 140 c/pound 4% 14% 22% Lean hogs 95 c/pound 0% 10% 16% Live cattle 114 c/pound 3% 9% 27% Lumber 247 $/tbf 3% 2% 25% Milk 20 $/100 lb 1% 13% 52% Pork bellies 107 c/pound 0% (12%) 10% Palm oil 1,031 $/tonne (3%) (9%) 35% Robusta coffee 2,319 $/tonne (1%) (9%) 36% Rough rice 15 $/100 lb (3%) (10%) 42% Soybean Oil 55 c/pound (1%) (4%) 49% Soybeans 1,315 c/bushel (1%) (4%) 40% Sugar no.11 26 c/pound 2% 20% 64% Sugar, no.5 668 $/tonne (0%) 15% 39% Wheat (CBOT) 661 c/bushel (7%) (20%) 42% Wheat (KCBT) 767 c/bushel (7%) (18%) 57%

White rice 576 $/tonne 3% 5% 6%

Brent crude 105 $/bbl (7%) (6%) 35% Coal, Nymex 76 $/tonne (0%) 0% 19% CO2 yr 3 13 /tonne (22%) (25%) (19%) Ethanol (CBOT) 2.6 $/gallon (1%) (1%) 72% Heating oil 2.8 $/gallon (8%) (5%) 31% Henry Hub 4.3 $/MMBtu (3%) (3%) (10%) RBOB gasoline 2.7 $/gallon (6%) (8%) 27% Gasoline 669 $/tonne 0% 0% 0% Uranium 55 $/pound (0%) (5%) 32% WTI crude 92 $/barrel (2%) (8%) 16%

$ index 75 (1%) (1%) (13%) euro/$ 1.42 (1%) 1% 16% 10yr y ield 2.87 (2%) (8%) (5%) S&P 500 1,268 (0%) (4%) 18%

MSCI index 1,116 1% (1%) 17%

12m, %Week, % Month, %

Financial

Metals

Agricommodities

Energy


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Crude oil: IEA turns politicalThe decision by member countries of the International Energy Agency to release

2m bpd of crude oil from strategic emergency reserves may knock 15 cents off a

gallon of gasoline in the United States and help President Obama win the

motorists vote but the organisations extraordinary, some might say

unfathomable intervention, creates fresh uncertainties in what is already a

nervous and volatile market. Theres no supply emergency on the sort of scale

that has led the IEA to open its taps only twice before in its 40-year history,

although there are fears that Opecs potential inability to meet rising demand later

in the year may yield another crude oil price spike.

Rather, there is an increasing urgency among major economies to re-ignite an

economic revival that is in danger of faltering, combined with open frustration that

members of Opec recently failed to do the decent thing and ramp up output to

take the steam out of stubbornly high prices. IEA stockpiles are intended to be

used solely to maintain supplies hit by earthquakes and wars; the decision has,

been formally justified by the loss of roughly 1.5m bpd from Libya, although

Saudi Arabia had already said it will make up the shortfall alone if it has to. These

reserves were never intended to be used in an effort to manipulate the price of

crude, and in turn to help the West out of a mire of its own creation.

With prices already falling, the IEA insists that there is a seasonal rise in demand

on the way, and that combined with a lack of Libyan supplies is producing

tightness in the market. The largest-ever sale of crude from strategic supplies

should, it says, be regarded as a sort of bridging loan. An alternative view is that

the organisation is using reserves that were originally envisaged as a defensive

shield more as a club to try and bludgeon prices. In any case its unlikely to work.

Crude prices understandably fell back on the news, given that global supplies will

rise by around 2.5% for the next month, although by Friday this week, the market

appeared to have paused to ponder on the extent to which the IEA decision will

change anything fundamental. To give a real boost to economic revival, oil might

have to fall back as far as $70/barrel, and the IEA has not got enough stocks to

push oil that low. Critics in the US (which will supply half the 60m barrels) said

the move was ill-timed, and merely meant that the supply cushion would have to

be replaced at a later date and at a much higher cost.

What are the other repercussions of the IEAs decision? An already squabbling

Opec has been given a bloody nose. Iran, the principal opponent to production

quota increases, attacked the IEA for its alleged unjustified interference; its not

alone among Opec members in muttering darkly about retaliatory measures to

maintain prices, if they sink back. But the IEA insists that the decision was taken

after full consultation with oil producers, including Opec. That means Saudi

Arabia. The Kingdom may not entirely like the idea of Opec being second-


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guessed at its own game but it may now at least be able to impress upon uppity

Opec members the need for full co-operation and agreement, if they are to

maintain their newly-challenged influence over global crude markets.

Asian central bankers: tough choices aheadDeveloping countries, where economic growth is already under threat from

rampant inflation, could now face further downside risks from slowing growth in

advanced countries. The looming fall-off in trade will be the prime driver of

moderating growth in exporting nations. This climate will then create a dilemma

for central banks of developing economies as they face the difficult choice of

whether to tighten monetary policy in the midst of (possibly) runaway inflation, or

adopt a more neutral-to-accommodative stance to aid growth. We have always

believed that China et al would be the ones most able to drag the world out of this

recession but if they are to do so they will run serious risks to their own

economic stability.

Exports to advanced economies, specifically the US and Europe, are expected to

slide over the next year, with the eurozone set to falter on high jobless rates

(9.9% harmonised), rising consumer prices (2.8% annualised average), and the

potential for a widening contagion from the Greek sovereign debt crisis. The

picture is equally troubling in the US, where the Federal Reserve recently cut its

growth outlook for 2011 to 2.9% from 3.3%, as unemployment (9.1%), a faltering

housing market, and the fall-out from the Japanese earthquake have taken a toll.

Major economic areas how do they compare?

0%

2%

4%

6%

8%

10%

12%

14%

Inflation rate GDP Growth Interest rate Jobless rate

Euro Area

United States

China

Brazil

India

Russia

Source: VM Group


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Yet, for central banks elsewhere, forestalling monetary tightening or cutting

interest rates to support growth the latter highly unlikely is sure to unleash

further inflationary pressures. At present, keeping both rising prices and asset

bubbles under wraps are emerging market monetary officials dominant policy

goals, as inflation rips through China (5.5%), Brazil (6.5%), India (9.4%), Russia(9.6%) and Vietnam (19.7%), to list a few.

The blame lies within this latter groups robust economic growth rates, various

forms of dollar pegging, and speculative inflows driven by excess global liquidity

and quantitative easing. If emerging market central banks temporarily halt their

tightening cycles, which some have recently begun doing, inflation is sure to

surge higher, as central banks only fall further behind the curve. A feedback loop

may then emerge, in which rising price pressures in Asia bleed into advanced

economies via higher import costs, while this in turn is acting to compound the

weakening growth rates in the latter.

Gold and silver: China churns out coins

Chinas central bank will produce nearly double the quantity of Gold Panda coins

this year than last, in response to surging demand. Rising inflation in China has

inspired a rush to gold investment, leading the Peoples Bank of China to

increase the production of Panda gold coins by 47% to 1.05 Moz, with one ounce

coin production increasing 67% to 500,000 oz, from the 300,000 oz originally

planned at the start of 2011. This equates to a 634,580 oz increase across the 7

gold Panda coin range. In addition, China plans to raise production of silver

Panda coins to 5.82 Moz, from its earlier plan of 3.09 Moz.

International sales of gold coins, Moz

-

1

2

3

4

5

6

7

2008 2009 2010 2011

South Africa - Kruggerand

Australian - Kangaroo

Austria- Philharmoinc

Chinese - Panda

Canadian - Maple Leaf

American - Eagle

Source: VM Group and various mints


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Although gold and silver coin buying accounts for a relatively small slice of overall

physical demand for these metals, its an important leading indicator of sentiment.

With some investors in the West cutting their exposure to precious metal futures,

(as seen this week by the fall in the gold Comex net long position for the first time

in four weeks to 26.94 Moz), physical demand is going strong. Asian investorshave been pouring in more money than ever into coins. The increase in

production to 783,860 oz means the Chinese Panda coin could overtake the

South African Krugerrand (2010 sales 734,859 oz) and the Austrian Philharmonic

(2010 sales 880,200 oz) in the near future. The US Mints Gold Eagle is the

leading investment coin - 2010 sales reached 1.64 Moz.So far this year the US

Mint has sold 845,000 oz and is looking likely to surpass the annual record of

1.80 Moz, set in 2009.

Sales of silver coins are also doing extremely well, with US American Eagle silver

coins sales of 3.65 Moz in May; silver coin sales by the US Mint are at their

highest ever, according to data going back to 1986. May sales were 30% higher

than April's 2.819 Moz, while total sales of American Eagle silver coins on a year

to date are 21.467 Moz, well on track to beat their 2010 sales year output, which

was a record 34.663 Moz. In the light of this unprecedented high demand, the US

Mint has also announced that (effective this week) it will be adding production

from its San Francisco facility to provide manufacturing flexibility across the

bullion and numismatic product lines, with the capacity to mint up to several

hundred thousand coins per week at the facility. In contrast, the Perth Mint

announced that demand is such that it cannot meet all enquiries; here, demand

for coins and medallions is strong, but the biggest demand is coming from banksand traders looking for kilo bars.

Silver prices almost doubled between January and April this year, spurred by

concern about Europe's debt crisis, higher inflation, a weakening dollar, and

unrest in North Africa and the Middle East. It now remains to be seen whether the

recent, sharp fall in the silver price will have affected demand either negatively

(because of nervousness about the future price direction), or perhaps positively,

with silver buyers seeing the lower prices as a buying opportunity.

Fertiliser: urea nears 2008 highs

Fertiliser prices have been moving up recently, a result of supply shortfalls, high

energy and raw material prices, and strong demand. Spot granular urea prices

recently surged to about $510/t, $280/t up on a year ago, and the market is likely

to stay tight. All the usual culprits are contributing to rising prices, including

energy costs, gas, oil and other raw material prices, demand influenced by

weather and crop prices as well as government tax and other policies. In the

case of urea and ammonia nitrogen fertilisers, both of which are normally


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derived from natural gas or the refined petroleum product naphtha production

has fallen across several countries over recent months, as oil and gas prices

have strengthened.

Urea prices, $/tonne: rhs, Yuzhny bulk spot price: lhs, Brent crude

200

250

300

350

400

450

500

550

600

60

70

80

90

100

110

120

130

140

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Source: VM Group

Chinese urea exports, which had been strong, have stalled since the imposition

of an early seasonal hike in export duties, in an attempt to reduce demand for

gas and electricity in the face of power cuts. While exports are forecast to resume

in July as duties fall again, they are unlikely to fully recover, given that China

appears keen to conserve supplies of urea for its domestic market. Chinese

exports, which had provided substantial additional supply to the global market,

could fall to around half of last year's 7 Mt.

Across Europe, production capacity has been restricted due to plant maintenance

or inadequate gas supplies (prices of which are usually linked to oil), with supply

disrupted from troubled North Africa. And in Pakistan and Bangladesh, gas

shortages or diversion or gas to power production has also reduced output

leading Pakistan to recently seek an additional 300kt of urea on the international

market. Egypt, normally a big urea exporter, is withholding supply for its domestic

market until August at least.

Major markets like Brazil, the Indian sub-continent and Thailand are just past the

normal peak buying periods, while demand in Europe and the US gathers pace

during June. The sharp price rises for this commodity mean that where

government import agencies or middle men operate and end-user prices are

regulated such as India and Thailand some shortages have occurred, as

officials allow for additional costs or raise regulated prices.


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Cocoa: Ivory Coast lowers export standards

Ivory Coasts decision to allow a higher bean count for exportable cocoa than

previously is one of those ad hoc moves thats likely to quietly become anestablished norm. From 15 June to the end of September which coincides with

the countrys mid-crop a bean count of 125 per 100 grams will be permitted.

Previously, a minimum of 105 beans per 100 grams was required. This may

seem only a slight change, but it actually means that 19% of this years Ivory

Coast mid-crop that might nothave qualified for export will now do so. We think

that Ivory Coast this season (2010-2011) might see total cocoa production of as

much as 1.4 million tonnes, with perhaps 350,000 tonnes of that coming from the

mid-crop.

Moreover, a higher bean count (and a general rule of thumb is that it should notexceed 110 beans/100 grams) equals a lower overall quality, as smaller beans

contain less fat. Generally speaking, the lower the bean-count, the better the

quality. In smaller producers such Venezuela, its not unusual to find as few as 90

beans per 100 grams. Depending on the quality of the chocolate, it takes 300-600

beans to produce a kilo of chocolate. Ivory Coasts cocoa regulator, the BCC,

shed little light on the decision. A statement issued said, Due to exceptional

circumstances, and to reflect the growing conditions of the mid-crop, a bean

count of 125 per 100 grams will be allowed.

What might those exceptional circumstances be? It seems likely that this is anattempt to make extra profits for the state treasury at a time of unusually high

prices, and when Ivory Coast is scrabbling round for every penny it can get. The

danger is that this is a thin end of a thick wedge if other export quality

standards are relaxed, such as controls over levels of mould, then Ivory Coasts

standing as a consistent producer of reasonably high quality beans could be in

jeopardy.


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Key charts relating to commodities

Euro v dollar

Dec10 11

Feb Apr Jun

1.275

1.300

1.325

1.350

1.375

1.400

1.425

1.450

1.475

1.500

Yen v dollar

Dec10 11

Feb Apr Jun

77

78

79

80

81

82

83

84

85

86

Sterling v dollar

Dec10 11

Feb Apr Jun

1.525

1.550

1.575

1.600

1.625

1.650

1.675

Rand v dollar

Dec

10 11

Feb Apr Jun

6.56.6

6.7

6.8

6.9

7.0

7.1

7.2

7.3

7.4

Australian $ v dollar

Dec

10 11

Feb Apr Jun

0.910.92

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

Canadian $ v dollar

Dec

10 11

Feb Apr Jun

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

Treasury 3m bill yield, %

Dec

10 11

Feb Apr Jun

0.000

0.025

0.050

0.075

0.100

0.125

0.150

0.175

10yr - 2yr spread, %

$ euro

08 09 10 11

-0.5

0.00.5

1.0

1.5

2.0

2.5

3.0

Purchases of Treasury bonds

06 07 08 09 10

USD

(billions)

0

250

500750

1000

1250

1500

1750

2000

2250


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Breakeven rate 10yr TIPS

Breakeven rate10 year yield

06 07 08 09 10 11

Percent

0

1

2

3

4

5

6

Industrial production, 2000=100

USEuro

JapanUK

06 07 08 09 10 11

Index

70

75

80

85

90

95100

105

110

115

S&P 500, total return

02 04 06 08 10

2000

2500

3000

3500

4000

4500

5000

5500

Exports, start 2008 = 100

China,GermanyJapanS. Korea

US

Jun Sep Dec Mar

10 11

70

90

110

130

150

US & EU27 car sales, monthly

US EU 27

08 09 10 11

Numberof(millions)

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.251.30

OECD leading indicator

08 09 10 11

Indicator

90.0

92.5

95.0

97.5

100.0

102.5

105.0

Commodity indices

Reuters/CRBGSCI

08 09 10 11

Index

40

50

60

70

80

90

100

110

120

130

140

150

Commodity stock exchanges

Australia

BrazilRussiaCanada

08 09 10 11

Index

20

40

60

80

100

120

140

LME stocks

AluminiumCopperLead

NickelTinZinc

00 02 04 06 08 10

Tonnes(metric)(millions)

0

1

2

3

4

5

6

7


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Commodity Performance 2011


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vm group_abn amro commodity week #25

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