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The China Slowdown Effect Plus Fundamental Drivers Behind Commodities

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During this week's Invast Insights we cover:

► Fundament drivers behind the Commodities
► The China slowdown effect
► The future of the Copper

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The China Slowdown Effect Plus Fundamental Drivers Behind Commodities

  1. 1. 1 This week… • Fundament drivers behind the Commodities • The China slowdown effect • The future of the Copper
  2. 2. 2 General Advice & Risk Warning Please note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or advice given does not take into account your particular objectives, financial situation or needs. Therefore at all times you should consider the appropriateness of the advice before you act further. CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are for example only. You are reminded that past performance is not indicative of future performance. Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you decide whether or not to acquire any financial products. These documents are available at www.invast.com.au Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283
  3. 3. 3 This week we look at the following topics: • Fundament drivers behind the Commodities • The China slowdown effect • The future of the Copper
  4. 4. 4 Dear Readers, Throughout the monthly of October we will be publishing our views and insights on commodity prices after they have been absolutely savaged during the month of September. We thought this would be a great opportunity to run through some of the key markets that Invast quotes on its MT4 platform and compare price action against fundamental information. Invast clients will also have access to a webinar presented by Invast Insights editor Peter Esho on Tuesday 28 October at 6:30PM.
  5. 5. 5 Our focus will be on base metals and bulk commodities this month, all under savage price action as of the time of writing as global investors anticipate higher interest rates in the United States and drive up bond yields, in turn adding upward pressure to the US dollar. As a general summary, we think of commodities in the following two ways: 1. Industrial commodities – These are commodities like oil, copper, iron ore, nickel, zinc, tin and natural gas which are used in the production of goods and services (industry); and 2. Currency commodities – These are commodities like gold, silver and platinum which have little industrial use and more currency elements.
  6. 6. 6 Our weekly summary will be as follows: • Week commencing 6 October 2014 – a quick look over the price performance of key commodities • Week commencing 13 October 2014 – fundamental drivers behind the industrial commodities • Week commencing 20 October 2014 – the impact of China on the bulk commodities, namely iron ore and coal • Week commencing 27 October 2014 – medium to long term trading ranges for the key commodities and also a look at cross pairs like the gold to silver or gold to oil ratio.
  7. 7. 7 As we write this week, all major industrial commodities are heading lower. The big surprise has been the fall in the Brent crude price as traders start factoring in slower than expected short term demand from Europe and potentially China. We have spent a fair bit of time in recent months talking about energy prices and for the purpose of this report, our discussion on industrial commodities will instead focus on base metals and bulk commodities. China is really the largest marginal consumer of base metals and bulks in recent years. To put things into perspective, here are some facts that highlight just how large China plays a part in the global demand of both base metals and bulk commodities.
  8. 8. 8 • Between 2001 and 2011, China’s copper usage increased by 5.1 million metric tons (million mt), or 215%.2. By 2002, China surpassed the United States to become the world’s largest copper consumer. In 2011, China consumed 7.9 million mt of refined copper products, accounting for 40% of the global demand. China’s copper consumption is projected to rise to 9.7 million mt in this year, accounting for 84% of global copper demand growth between 2011 and 2014. • According to Goldman Sachs, this trend is starting to taper. Consumption of the metal will fall with the weakening of China’s property sector, which accounts for 50 percent of the nation’s copper demand. Goldmansestimate that global production of the metal used in wiring and pipes will exceed consumption by 385,000 tons this year and 454,000 tons in 2015.
  9. 9. 9 • China accounted for over 50% of world steel production in 2013. Iron ore and coking coal are key inputs into the steel manufacturing process and so the slowdown in China in recent months has put huge pressure on these two key commodities. "Over the next 10 years, according to our studies, China's steel production can be over 800 million tonnes for a long time, but it cannot go over 900 million tonnes," said China’s key steel industry source Li Xinchuang. • There is no doubt some element of China talking point the iron ore price here and trying to but as cheap as they can, although the reducing in steel manufacturing intensity we have seen in recent years is significant. Chinese production is growing slower than last year’s rate. May shows that crude steel production rose 4.5% on year in June to 69.29 million tons, up from 2.6% growth in May, according to National Statistics Bureau data. Production was up 3% in the first six months rose to 411.91 million tons but with much more supply coming into the global iron ore production market, the growth rates have not been large enough to capture the increased ore.
  10. 10. 10 • While China has been slowing its rate of growth, the pace of Indian growth in bulk commodity imports has surprised to the downside. Many in the industry had hoped the quick emergence of India’s economy would help cushion the impact of lower demand from China, but this has not occurred as expected. It costs about US$1bn to add one million tons of capacity in India at the moment and equipment accounts for 30% of that cost, which means India will create a market valued at USD$66bn for steel production equipment in the next 15 years – but not yet! The numbers look good going forward but they don’t necessarily provide any short term catalysts for the bulk commodities.
  11. 11. 11 While demand out of China is slowing in the short term, our focus is also on supply constraints. The recent falls in commodity prices and global uncertainty has seen huge price falls in the major global miners. There has been large reduction in capital expenditure for new mines and capital is very difficult to source. This will eventually lead to more supply shortages and support prices – particularly copper – over the medium term. Many coal mines have already started to shut down in the Bowen Basin of Australia which accounts for more than half of the country’s coal exports. Late last month, the Sydney Morning Herald announced global miners Vale and Sumitomo would shut down their Bowen Basin mines “Hundreds of workers at a Queensland mine are set to lose their jobs as the Australian coal sector continues to contract sharply. The Isaac Plains coalmine near Moranbah will cease production within months, after low coal prices forced the mine's owners, Brazilian miner Vale and Japanese trader Sumitomo, to act.
  12. 12. 12 It is believed the final decision was made on Monday, and news trickled out after Sumitomo informed the Tokyo Stock Exchange of the decision. Sumitomo announced the mine, which produces both thermal and coking coal and employs 300 workers, would be placed on "care and maintenance" early in 2015…” We don’t doubt the ability of metal prices to continue falling, we just don’t see them falling for ever…particularly copper. We spoke last week about the huge increase in nickel prices at LME warehouses and the relatively low levels of copper on hand in our analysis of charts via kitcometals.com The charts below illustrate the supply shortage issues facing copper. Grades are an issue and as the copper price continue to trend down towards US$3/lb, many mining companies like Rio Tinto, BHP Billiton are finding it extremely difficult to invest in their copper assets at an adequate enough return.
  13. 13. 13 Source: Rio Tinto presentations, Brook Hunt, National Institute of Statistics Chile and Peru
  14. 14. 14 Source: Rio Tinto presentations, Brook Hunt, National Institute of Statistics Chile and Peru
  15. 15. 15 The supply constraints in copper are enough for us to stick with our view that long term support levels near US$3/lb or thereabouts should hold in the coming months. We have seen a previous test of this level earlier this year and the support level held that time. The chart below shows the importance of US$3/lb for copper in a historical context. Chart: Five year spot copper price chart sourced through kitcometals.com
  16. 16. 16 Bottom line: Industrial commodities are falling because of doubts over China and the slowdown in the European economy. The situation around iron ore is difficult to predict because of the vast volumes of production moving in and out of China. The copper price is perhaps a more transparent market to trade and production will continue to struggle – both in terms of grades and volumes – over the medium term. Poor sentiment and a reduction in new expenditure from the major miners will make it difficult for copper production to match expectations.
  17. 17. 17 Copper is has wide industrial applications. It is used as a conductor of heat and electricity, a building material, and a constituent of various metal alloys. The table to the left shows the copper instrument quoted on Invast MT4 platform. During the webinar later this month, we will be talking through the key technical levels of this instrument and the recent price action. We will also have the long term chart up on the screen to help indicate key support levels. Details to the webinar are below.
  18. 18. 18 Commodities outlook: Join the webinar to discuss these points Invast Insights editor and contributing author Peter Esho will summarise the October outlook guide for key commodities – copper, nickel, gold and silver - in this exclusive webinar. Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline: Current price actions on the key commodities Fundamental drivers behind demand and supply The impact of China – are things about to change? Trading key cross pairs like the gold to silver ratio and gold to oil Peter’s webinar will cover both the fundamental and technical outlook on key commodities quoted on Invast’s MT4 platform, plus the key drivers to look out for when trading. This webinar is expected to fill fast. Q&A will be open straight after the presentation. Register now by clicking here.
  19. 19. 19 Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.
  20. 20. 20 Disclaimer Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us. General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).
  21. 21. 21 Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances. General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.
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