Industrial Metals Retreat; Aluminum Gains on Deficit Forecast

Market Highlights

ASIA-PACIFIC REGION

China’s economic growth accelerates in Q2

China’s economy grew faster than expected in Q2, exceeding estimates for the first time in the last three quarters. The world’s second biggest economy expanded 7.5% in April-June period compared to a previous quarter’s reading of 7.4%. Experts predicted GDP to grow to 7.4% in Q2. Meanwhile, separate data releases fortified the view that economy is gaining pace. Banks increased lending activity in June, with loans approaching 1.08 trillion yuan versus a forecast of 915 billion yuan. Industrial production boosted optimism – industrial output rose annualized 9.2% in June, whereas experts called for a 9% gain after a 8.8% rise in May.

EUROPE

European data turns negative

The Eurozone’s numbers were on the negative side last week. German investor confidence deteriorated for the seventh month in a row in July as suggested by a 2.7 points drop in ZEW investors sentiment index. The gauge declined to 27.1 in July from 29.8 in June; experts predicted a fall to 28.9. Meanwhile, trade surplus remained steady near 15.3 billion euros in May compared to a forecast of an expansion to 16.3 billion euros. Annual inflation rate also posed concerns, remaining at 0.5% in June, the lowest level since November 2009.

NORTH AMERICA

U.S. retail sales and housing market data miss forecast

U.S. retail sales rose 0.2% in June, falling short of estimates of a 0.6% growth and compared to a 0.5% jump in May. Core retail sales added 0.4%, the same increase as in May but at slightly slower pace than a forecast of a 0.5% rise. Furthermore, housing market figures were disappointing – building permits and housing starts unexpectedly declined in June thus questioning if the world’s largest economy will manage to show a notable growth in the second quarter. However, jobs market data injected some confidence as the number of jobless claims unexpectedly declined last week.

Precious Metals Mostly Lower Despite Positive Demand and Supply Signs

Gold started the week with a rapid decline that sent the yellow metal to a three-week low. Easing worries over Portugal’s banking system as well as solid gains across the world’s stock markets created a headwind to the bullion’s prices. However, later in the week the shiny metal was more resilient; it managed to halt the losing streak thus remaining above an important mark of $1,300 per ounce. The key support came from the physical demand side – gold imports by India, the second biggest buyer, soared 65% in June as the Reserve Bank of India permitted more firms to purchase gold since recent import curbs helped to narrow the trade gap. Nevertheless, the precious metal closed with a 2% loss last week after posting a 1.2% advance in the preceding week.

Silver was feeble as gold futures reversed their trend and moved in the southern direction. The grey metal closed lower more than 2.5% thus reducing its monthly gain to 5.35. Meanwhile, ETF inventories showed that investors have become more bearishly biased towards silver. Holdings in total known ETFs backed by silver dropped almost 0.4% month-on-month, the only monthly dip among metals in the sector.

Platinum and Palladium were trading mixed as supply concerns continued to dominate the markets. Despite a long-awaited resolution to the labour dispute in the platinum-mining industry in South Africa, new stoppages may indirectly impact already tight platinum supplies. However, investors considered the previous rally in platinum the be excessive thus forcing the metal to end in the red zone. At the same time, palladium was the only gainer, skyrocketing to a 13-year high as Western economies eventually imposed new sanctions on Russia. This may constrain exports from the world’s biggest supplier at a time when demand from car industry continues to strengthen.

Industrial Metals Retreat; Aluminum Gains on Deficit Forecast

Aluminum soared to a 16-month high amid upbeat reports from the top consumer, China, and a fall in the LME inventories. LME inventories registered a decline of 1% on a weekly basis and a 9.5% drop year-to-date. The lightweight metal also drew some strength from the latest deficit forecast from Alcoa. Alcoa, the third biggest aluminum producer, now expects global demand to outplace supply by 930,000 tonnes compared to previous prediction of 730,000 tonnes. At the same time, the climb in prices was limited as Macquarie, an investment group, said that more production will come in the second half of the year as smelters are likely to increase output amid higher prices.

Copper did not manage to swing to gains last week even despite supportive news from China. Updated forecast from Goldman Sachs Group appeared to be the main bearish factor; the bank said the red metal is likely to follow a downside trend in the next 12 months due to rising supplies. Goldman also added that surplus is likely to persist for the third year in a row in 2014 and may reach 385,000 tonnes. This was also confirmed by Rio Tinto that reported a 2.6% jump in full-year mine production.

Nickel faced a hard time to advance since LME inventories stood around 58% higher year-to-date and continued to rise last week, posting a 1.2% weekly gain. Additionally, there is still a large potential for a retreat as the metal did not erase much gains it posted in the beginning of the year when Indonesia, the world’s largest shipper, imposed a total ban on metal ore exports.

Zinc failed to preserve its bullish trend but continued to vacillate near a 35-month high amid low LME inventories. LME stockpiles fell 0.5% last week, adding to a circa 39% decline year-to-date.

Energy Futures Mixed amid Ukrainian Woes; Natural Gas Dives to 6-month low

WTI and Brent oil traded lower in the very beginning of the week but shot up in the following sessions amid supply concerns and signs of stronger demand. Speculation that a previous decline was excessive – WTI and Brent oil lost more than 3% in the preceding week – also gave impetus for a climb. Among the key supportive factors from the supply side were fresh sanctions on Russia, an escalation of tensions in Ukraine as well as movement of Israeli troops to the Gaza Strip.

From the demand side, the EIA report lent solid support last week. In the week ended July 11, U.S. crude oil inventories slumped 7.5 million barrels compared to a forecast of 2.1-million-barrel drop and versus a decline of 2.4 million barrels in the preceding week. A rapid decrease in inventories was attributed to the fact U.S. refineries boosted oil processing to the biggest level in nine years last week. Meanwhile, upbeat economic data from China added to signs of demand improvement across the globe.

Natural gas plunged close to a six-month low in the second part of the week as the EIA report showed inventories jumped more than predicted. U.S. stocks climbed 107 billion cubic feet in the week ended July 11 versus an estimate of a 99-billion-cubic-feet rise and a previous week’s reading of an increase of 93 billion cubic feet. However, total storage still stood near 2.129 trillion cubic feet, remaining under the five year average of 2.856 trillion cubic feet. Weather forecasts were on the negative side, calling for a cool snap in the most populated areas in the Midwest and Northeast.

Heating oil got a boost from notable gains in WTI and Brent oil futures but a large increase in inventories over the last three months limited the upswing. Distillate fuel inventories, which include heating oil and diesel, jumped more than 11% thought the period started in mid-April.

Agricultural Commodities Recover Losses as U.S. Weather Conditions Worsen

Wheat pared a more than a 9% loss it faced in the preceding week by as the grain got an impetus from rumors that the decline that followed a bearish USDA report was excessive. In the week ended July 13, the USDA released its monthly Wasde report unveiling that world ending inventories in 2014/15 season may be 930 million tonne higher than previously thought; investors now are forecast to attain 189.5 million tonnes. At the same time, worries that wetter weather conditions in the U.S. may hamper harvest and increase possibility for fungal diseases lent some support to the commodity.

Corn bounced off a four-year low in the first days of the week as deteriorated weather conditions in the U.S., the world’s biggest producer, posed concerns over the record harvest expected this season. Notwithstanding this, the grain was forced to restart its dive after the USDA announced that U.S. crops were still in the best condition since 1994. Moreover, U.S. export data was on the negative side – U.S. farmers sold slightly more than 920,000 tonnes of corn last week, considerably less than 1.26 million tonnes sold in the preceding week.

Soybeans outperformed grains last week on strong demand for U.S. supplies. The oilseed surged the most in eight weeks on Wednesday after the USDA reported a 120,000-metric-tonne sale to China and 240,000-metric-tonne sale to unknown destinations. The commodity that touched a three-year low in the week ended July 13 also gained inspiration from India’s crop concerns. India, fifth largest producer of the oilseed, may see its output declining to a five-year low due to monsoon rainfalls.

Coffee started the week on a high note as some dip buying took placed following a 6% weekly drop. Meanwhile, investors are still awaiting updates on Brazilian crop condition as the real extend of drought damage remained unclear.

EXPLANATIONS

Commodities

• Gold - COMEX active contracted (USD/t o.z.)

• Silver - COMEX active contract (USD/t o.z.)

• Platinum - New York Mercantile Exchange active contract (USD/t o.z.)

• Palladium - New York Mercantile Exchange active contract (USD/t o.z.)

• Aluminum-Active contract of primary aluminum of minimum 99.2% purity at the LME (USD/MT)

• Copper –Active contact of electrolytic copper at the LME (USD/MT)

• Zinc - Active contract of zinc od minimum 99.995% purity at the LME (USD/MT)

• Nickel– Active contract of nickel of 99.8% purity at the LME (USD/MT)

• Crude oil - light, sweet crude oil active contract on the New York Mercantile Exchange (USD/bbl.)

• Brent oil - Brent oil active contract on the ICE Futures Europe (USD/bbl.)

• Natural Gas - natural gas active contract on the New York Mercantile Exchange (USD/MMBtu)

• Heating oil - heating oil active contract on the New York Mercantile Exchange (USD/gal.)

• Wheat - wheat active contract on the Chicago Board of Trade (cents/bu)

• Corn - corn active contract on the Chicago Board of Trade (cents/bu)

• Coffee - benchmark Arabica coffee active contract on the NYB-ICE Futures Exchange

• Soybeans -active contract on the Chicago Board of Trade (cents/bu)

Indices

• S&P GSCI Precious Metals Total Return Index - commodity group subindex composed of gold and silver; the index reflects return on underlying commodity futures price movement

• S&P GSCI Industrial Metals Total Return Index - commodity group subindex composed of futures contracts on aluminium, copper, lead, nickel and zinc

• S&P GSCI Energy Total Return Index - commodity group subindex composed of futures contracts on crude oil, Brent oil, RBOB gas, heating oil, gas oil and natural gas

• S&P GSCI Agriculture Total Return Index - commodity group subindex composed of futures contracts on wheat, red wheat, corn, soybeans, cotton, sugar, coffee and cocoa

Indicators

Long-term price forecasts-aggregated price forecasts based on predictions of 20 international banks forecasts

USDA Wasde Total Estimated Inventories (Today)-current level of inventories of wheat in 1000 MT, corn in 1000 MT, soybeans in million bushels and green coffee in 1000 bags