Fortis metals monthly

Fortis metals monthly


November 2008
Merchant Banking INVESTMENT RESEARCH
Gold, silver, platinum,
palladium, aluminium,
copper, nickel, lead & zinc,
tin, plastics, steel.
VM Group
Tel. +44 20 7487 3600
info@vmgroup.co.uk
Fortis/VM group November 2008 | Fortis metals monthly | 1
Contents
Metals and plastics – Strategic view 3
Analysis 6
Focus - Base metals supply-demand issues 9
Focus - Commodity index rebalancing 14
Hedge funds activity 22
Gold 23
Silver 24
Platinum 25
Palladium 26
Aluminium 27
Copper 28
Nickel 29
Lead and zinc 30
Tin 31
Steel 32
Plastics 33
Prices 34
Quantitative research 35
Disclaimer and copyright 43
About Virtual Metals 44
Fortis Metals Monthly is an exclusive precious and base metals research joint
venture between Fortis Bank SA/NV and VM Group.

Fortis/VM group November 2008 | Fortis metals monthly | 3
Metals and plastics – Strategic view
Introduction
Industry got a shot in the arm in early November, as China announced a $586bn
economic stimulus plan to the end of 2010 to boost infrastructure, housing, rural
reform and environmental projects. But the economic recession is now global
and it is far too soon to know how severe it will be. One can only keep an eye on
global indicators and other data; right now, they still all point towards a once-ina-
generation event.
Gold
Some investors seem to love gold, and physical sales are soaring in traditional
markets. But the price has failed to match the hype. It still might see rapid gains,
perhaps when hedge fund liquidation has run its course. But it needs to do so
soon, or disillusionment will step in.
Silver
Silver surprised us with a late rally, but it was from an extremely low base.
Speculators have started to return to the market, a good sign, but the ETF
investors, who never exited, might be tempted to sell if prices pick up a little
further.
Platinum
Platinum is now suffering from a belated realisation that European car sales
might turn down further than even those in the US. But platinum supply remains
precarious and prices are unlikely to go much lower than they have done.
Palladium
Under $200/oz seemed to see some bargain hunting, and it is reasonable to
suggest that the metal had fallen too far case. The temporary closing of North
American Palladium’s mine, and large imports into the UK, which are probably
car-company related, have been supportive.
Aluminium
About 17 Mt/y of aluminium production capacity is operating at a loss, as prices
toy with $1,900/t. Slumping global car sales, which account for a large portion
of aluminium consumption, should see further price falls, especially as necessary
aluminium production cuts are only now being implemented.
Copper
Copper fell from grace spectacularly through October to mid-November, teasing
$3,500/t levels. Fundamentally it is weak. The global economic downturn has
seen huge stock builds and not enough supply response. Price risk is on the
downside.
Nickel
The nickel market is dire and there appears only one-way for it to go, down.
Huge stocks, a growing surplus and a very weak stainless steel sector will
continue to depress prices. We estimate that as much as 100,000t of refined
nickel expected in 2009 will now not make it, as producers scale-back
expansions and new projects are suspended.
Lead and zinc
The zinc market is in trouble. Global construction, the metal’s principle market,
was one of the first sectors to get hit in the current downturn, and the global
picture for new car sales is nothing less than appalling. Lead, however, produced
mainly as a zinc by-product, can only benefit as zinc output falls. We expect
zinc to edge lower, while lead, due to its tight fundamentals, will remain
supported.
Analyst: Matthew Turner
VM Group
Tel: +44 20 7487 3600
Email: matthew@vmgroup.co.uk
Analyst: Gary Mead
VM Group
Tel: +44 20 7487 3600
Email: gary@vmgroup.co.uk
Analyst: Carl Firman
VM Group
Tel: +44 20 7487 3600
Email: carl@vmgroup.co.uk
4 | Fortis metals monthly | November 2008 Fortis/VM Group
Tin
Tin is now the darling of the base metals. The two largest producers – China and
Indonesia – control the tap in a tight market with very low stock levels. The
price is likely to remain stable.
Steel
Construction suffers during any recession. This one is a global affair and even
China will slow appreciably from its past double-digit growth. The growth in
steel production capacity over the past several years will now be tested severely.
LME contracts’ prices are at almost a quarter of their June levels. Prices will
edge lower and remain weak for some time.
Plastics
A poor mix of sharply lower oil prices and slumping demand has seen plastics’
prices on the LME hit their lowest since launch. Prices forecast to remain weak.
Fortis/VM group November 2008 | Fortis metals monthly | 5
Forecasts
Price forecasts
14th Nov 1-month 2-month 3-month 12-month
Gold $ per oz 747.50 730-820 (r) 800-1,000 800-900 850
Silver $ per oz 9.33 9-11.50 (r) 11-14 11-14 13
Platinum $ per oz 845 800-950 (r) 750-950 (r) 700-900 (r) 800
Palladium $ per oz 216.0 190-250 (r) 200-350 200-350 300
Aluminium (3-month) $ per tonne 1,941 1,800-1,950 (r) 1,700-1,800 (r) 1,700-1,800 (r) 1,950 (r)
Copper (3-month) $ per tonne 3,785 3,300-3,700 (r) 3,200-3,500 (r) 3,000-3,500 (r) 4,100 (r)
Lead (3-month) $ per tonne 1,361 1,300-1,400 (r) 1,300-1,400 (r) 1,300-1,400 (r) 1,500 (r)
Nickel (3-month) $ per tonne 11,300 9,500-11,000 (r) 9,500-11,000 (r) 9,500-11,000 (r) 11,000 (r)
Tin (3-month) $ per tonne 14,025 13,500 (r) 13,500 (r) 13,000 (r) 15,000 (r)
Zinc (3-month) $ per tonne 1,209 1,000-1,200 (r) 950-1,000 (r) 950,1,000 (r) 1,100 (r)
Plastic: LL (Global) $ per tonne 695 650 (r) 650 (r) 600 (r) 700 (r)
Plastic: PP (Global) $ per tonne 745 700 (r) 700 (r) 650 (r) 750 (r)
Steel: (3-month) Med $ per tonne 355 300-400 (r) 340 (r) 400 (r) 400 (r)
Steel: (3-month) Asia $ per tonne 335 300-400 (r) 320 350 350
Average/2009 Average/2010 Average/2011 Average/2012 Average/2013
Gold $ per oz 825 800 650 650 650
Silver $ per oz 12 12 10 10 10
Platinum $ per oz 1,300 (r) 1,400 (r) 1,500 (r) 1,400 (r) 1,200 (r)
Palladium $ per oz 250 (r) 300 (r) 350 (r) 350 (r) 250 (r)
Aluminium (3-month) $ per tonne 2,200 (r) 2,400 (r) 2,500 (r) 2,650 (r) 2,700 (r)
Copper (3-month) $ per tonne 4,500 (r) 5,500 (r) 6,000 (r) 7,500 (r) 8,000 (r)
Lead (3-month) $ per tonne 1,300 (r) 1,200 1,200 1,200 1,200
Nickel (3-month) $ per tonne 11,000 (r) 14,000 (r) 14,000 (r) 16,000 (r) 16,000
Tin (3-month) $ per tonne 15,000 (r) 15,000 (r) 15,000 12,000 10,000
Zinc (3-month) $ per tonne 1,100 (r) 1,200 (r) 1,700 1,900 (r) >2,000 (r)
Plastic: LL (Global) $ per tonne 750 (r) 800 (r) 850 (r) 850 (r) 1,000 (r)
Plastic: PP (Global) $ per tonne 750 (r) 800 (r) 850 (r) 850 (r) 1,000 (r)
Steel: (3-month) Med $ per tonne 320 (r) 1,000 1,000 1,200 1,400
Steel: (3-month) Asia $ per tonne 300 (r) 900 900 1,100 1,300
Source: VM Group [r] = revised from previous month
Market Update
Prices and stock levels
Prices
(14th Nov)
Most
recent
price
Average
over past
12 M
High
Low Price
1 week ago
WoW
(%)
Price
1 month
ago
MoM
(%)
Price
12 months
ago
YoY
(%)
Average
2007
Average
2006
Gold $/oz 747.5 871.6 1,011.3 712.5 733.8 2 784.5 (5) 778.9 (4) 696.5 604.0
Silver $/oz 9.33 15.52 20.92 8.88 9.9 (6) 9.6 (2) 14.5 (36) 13.4 11.6
Platinum $/oz 845 1,653 2,273 763 821.0 3 856.0 (1) 1,455.0 (42) 1,304.7 1,141.9
Palladium $/oz 216.0 372.2 582.0 168.0 221.0 (2) 172.0 26 362.0 (40) 354.7 320.4
Aluminium $/tonne 1,941 2,723 3,341 1,915 1,961.0 (1) 2,175.0 (11) 2,538.0 (24) 2,662.0 2,593.4
Copper $/tonne 3,785 7,308 8,812 3,635 3,715.0 2 4,650.0 (19) 6,939.0 (45) 7,095.9 6,670.6
Lead $/tonne 1,361 2,300 3,461 1,165 1,285.0 6 1,337.0 2 3,150.0 (57) 2,557.9 1,281.6
Nickel $/tonne 11,300 23,387 33,605 9,025 11,195.0 1 10,560.0 7 31,350.0 (64) 36,217.1 23,265.6
Tin $/tonne 14,025 19,099 25,500 11,300 14,350.0 (2) 13,400.0 5 17,255.0 (19) 14,532.3 8,765.8
Zinc $/tonne 1,209 2,046 2,841 1,096 1,105.5 9 1,169.0 3 2,435.5 (50) 3,243.2 3,252.4
PP $/tonne 695 1,469 1,930 695 745.0 (7) 1,150.0 (40) 1,367.5 (49) 1,220.2 1,176.4
LL $/tonne 745 1,457 1,750 745 840.0 (11) 1,275.0 (42) 1,340.0 (44) 1,254.9 1,213.2
LME Stocks
(14th Oct)
Most
recent
stocks
Average
over past
12 M
High
Low Stocks
1 week ago
WoW
(%)
Stocks
1 month
ago
MoM
(%)
Stocks
12 months
ago
YoY
(%)
Average
2007
Average
2006
Aluminium Tonnes 1,611,650 1,104,038 1,611,650 922,000 1,556,150 4 1,487,350 8 922,000 75 842,573 723,253
Copper Tonnes 275,900 161,889 275,900 109,025 270,100 2 212,400 30 181,275 52 158,899 119,593
Lead Tonnes 43,950 62,278 101,900 41,650 44,800 (2) 58,475 (25) 42,500 3 37,218 76,115
Nickel Tonnes 46,104 48,999 60,162 42,324 58,176 (21) 55,422 (17) 42,324 9 18,110 17,324
Tin Tonnes 3,430 8,169 13,500 3,010 3,180 8 5,040 (32) 13,415 (74) 11,891 13,187
Zinc Tonnes 183,925 134,162 184,000 76,475 182,500 1 170,050 8 81,975 124 81,377 218,452
Source: VM Group
6 | Fortis metals monthly | November 2008 Fortis/VM Group
Analysis
Landfill: a new metal resource?
The concept of making money from garbage is a fascinating one, especially in
developed countries, which for decades have been burying deep underground
ferrous and non-ferrous metals, plastics, organic material and other valuable
matter. The first ever landfill mining conference was staged in London recently,
which was unfortunate timing – with the current depressed prices there is little
incentive to dig deep to recycle – but the longer term suggests there may be
some decent, if not exactly rich, pickings to be had one day.
Pioneered in India in 1953, landfill mining is the process whereby waste is
excavated and processed for its high-value constituents. It should not be
confused with the traditional recycling industry, where waste is sorted and
recycled before burial. Of course, the bigger and more economically advanced
the country, the greater the volume of waste generated.
Biggest of all is, inevitably, the US, where in 2006 (the last available year for
complete figures) 251 Mt of municipal solid waste (product packaging, grass
clippings, furniture, clothing, bottles, food scraps, newspapers, appliances, and
batteries) was generated, according to the US Environmental Protection Agency
(EPA). Metals made up 19.1 Mt (7.6%) of this total, with just 6.95 Mt of metal
recovered for recycling before being sent to landfill. Ten years earlier the US
generated approximately 16 Mt of metal contained in municipal solid waste,
with 10 Mt going to landfill.
The picture for the countries that make up the EU-25 is similar. In 2006,
approximately 250 Mt of municipal solid waste was generated, of which 110 Mt
was sent to landfill, slightly down from 1995, when about 125 Mt went to
landfill. Although no figures are available, the proportion of metals’ content in
EU25 municipal waste is likely to be similar to that of the US.
We estimate that about 290 Mt of metal has accumulated in landfill in the EU25
alone since 1980, and a similar amount in the US. Looking even further back,
into the 1960s and beyond, the metals contained in landfill in the EU25 and US
alone would be more than 1,000 Mt; this does not take into account non
municipal waste, such as construction and demolition debris, sludge and other
types of waste. Steel comprises about 75% of the metal sent to landfill,
aluminium 20%, with the balance being comprised by other non-ferrous metals,
such as copper, tin and lead. Such a vast metals’ ‘underground pit’ is a big
resource with, potentially at least, some strong commercial interest.
Actual and projected municipal solid waste generation, landfill usage and accumulated metals
content 1980-2020 in the EU-25
0
50
100
150
200
250
300
350
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020
MSW (Mt)
0
50
100
150
200
250
300
350
400
450
Accumulative metals content
(Mt)
MSW to landfill MSW generated Accumulative metals content (Mt)
Source: European Environment Agency, VM Group
Analyst: Carl Firman
VM Group
Tel: +44 20 7487 3600
Email: Carl@vmgroup.co.uk
Fortis/VM group November 2008 | Fortis metals monthly | 7
Complexity costs
The key word here is ‘potentially’. The crux of getting to the bottom of this
man-made metals’ pit is the cost of doing so. The sheer diversity of landfill sites
complicates the mining process, as each site has its own set of circumstances
that affect the economics of a potential project. Nor is it simply a case of
landfills coming in different shapes and sizes. The amount of decomposition
varies with climate and age; rural landfills have different ingredients, with
different proportions of them than urban landfills. Some landfills may have
accepted more construction and demolition wastes, while others contain more
industrial waste. A number of landfills may contain serious toxic hazards, while
others are benign. In addition, some countries have well-defined regulations
governing landfill mining, while many others have little experience with the
process.
In developed countries with established landfill regulations, exploitation of
landfills is generally only permitted after a certain amount of time has passed.
This is to ensure that the buried waste material has properly decomposed and
therefore greenhouse gases, such as methane and carbon dioxide, have
sufficiently depleted. But the regulations permitting exploitation often have
widely different timeframes. For example, in England no landfill can be
exploited before a minimum of 30 years, but in Scotland the minimum is 60
years.
Complicating the picture further is that the vast majority of old landfill sites
have no detailed records of where the different types of waste are accumulated,
or indeed, what was actually buried. Hence a company wishing to mine for
metals in any given landfill site will have to undertake extensive research and
pre-development studies before going ahead –in the same way as much
traditional mining. However, medical waste, asbestos and potentially radioactive
material in landfills places a greater hazard on exploitation than traditional
mining, and therefore investigation and development can be more costly and
time consuming. Another complexity is the socio-environmental effects. Many
landfills are located close to or, in some cases, beneath urban areas. Those
wishing to develop mining projects on landfill sites must first satisfy national
and regional governments, in addition to the local population over safety,
disruption and pollution.
The data for the size and attributes of each landfill site and the quantity, if any,
of hazardous material is at best vague when it comes to old sites. Better records
have been kept in recent years. Thus for example it’s known that, of the 163 Mt
of waste (municipal, construction etc) generated in the UK in 2006, 69 Mt was
sent to landfill. From this, 6 Mt was classified as hazardous material with
900,000t going to landfill, down from 1.6 Mt in 2004. It would seem logical that
in old landfill sites, which could be targets for mining, there will be a higher
fraction of contained hazardous material in the UK and, by extension, the rest of
the developed world.
Excavation of a site containing hazardous material would require airtight domes
over the landfill site and safety equipment for each and every employee, as
demonstrated by waste material specialists SITA UK at the recent London
landfill mining conference. According to SITA, organic materials will have
decomposed – and hopefully the subsequent methane burnt off as fuel – and all
but the most inert of metals, such as gold, will have been eaten away in the
corrosive soup. However, there could be plenty of plastic. In the UK alone, there
is an estimated 200 Mt of buried plastic to be recovered and recycled, or
converted to power generation or liquid fuel.
A further factor to be considered by anyone interested in mining landfills is that
those with greatest commercial potential are likely to be found only in advanced
economies, not just because such economies tend to be the most wasteful, but
also because in the developing world scavenging has already removed much of
8 | Fortis metals monthly | November 2008 Fortis/VM Group
the high value metals. According to MVW Lechtenberg, a German-based
company with extensive waste experience across northern Africa, the Middle
East and Asia, many dumpsites in the developing world contain very little
materials of worth, due to scavenging. Besides producing refuse-derived fuels,
an innovative process to produce energy from the incineration of certain
shredded waste material, there seems very little economic advantage to process
dumpsites or landfills in developing countries.
Deep pockets required for digging deeply
So what sort of returns might be expected if you go ahead and mine an old
landfill site for metals? Mayer Environmental has done just that. In 2000 the
company targeted a 66,000t landfill site containing 1950s-1960s waste in the
UK. The landfill was known to contain demolition debris and hence a high
metals’ content probability. It was also known to be benign. The project was
expected to take four to five months, but delays in securing permits and licences
from regulators extended that to four years. Ultimately it recovered 7,000t of
ferrous metals and 3,750t of non-ferrous metals, but made a loss of £163,035
($275,000) after operational costs. As a simple dynamic for a mining company
this would be unacceptable; but for a waste remediation firm, the project
removed the running landfill care and maintenance liability of £3m, and hence
was a success.
The bottom line is that landfill mining is unlikely to have much of a long-term
future as a stand-alone operation, and certainly not when (as right now) the
prospects for base metals’ prices are particularly unattractive. But when seen in
conjunction with other business types – i.e. eradicating maintenance costs – is
quite attractive, and will become even more so as the available space for future
landfill waste becomes even more scarce. It’s certainly a field worth watching.
Fortis/VM group November 2008 | Fortis metals monthly | 9
Focus
What goes up like a rocket can fall like a stone
We have become accustomed to records being smashed in the base metals’
markets, and so they were again in October and through to mid-November. But
this time it was in just one direction – down, down and down again. Now that
many of these metals are either close to or below the marginal cost of
production, will the flurry of supply-side responses (cutting output more or less
everywhere) be quick enough to restore a semblance of order? Or is there
further weakness to come?
The rout of the entire base metals complex since mid-September needs to be
placed into context. It’s no comfort to investors and producers to be told that the
speed and severity of the great metals sell-off was partly to do with a generalised
flight from risky assets, in turn caused by a massive unwinding of credit, but
such was the case. Base metals were due a fall, because they are naturally
exposed to industrial slowdown (more so, say, than soft commodities, although
energy commodities were also hit badly). It was the speed that surprised. The
deleveraging that took place, the unwinding of long-only bets and systematic
shorting, was swift and merciless and led to prices plummeting to levels last
seen years ago.
€/$ and 3m copper price
€/$ and 3m aluminium price
0.60
0.65
0.70
0.75
0.80
0.85
Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
USD/EUR 3M copper
0.60
0.65
0.70
0.75
0.80
0.85
Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
USD/EUR 3M aluminium
Source: VM Group Source: VM Group
Effectively, the multi-year rise in prices has been wiped out in just seven weeks,
and the rapidity with which this has all unravelled may have done some lasting
damage to the perception that commodities are a sound vehicle for portfolio
diversification and medium to long-term investment. That might be a false
deduction, but in such gloomy days it’s easy to see why it might be made.
The case for investment interest in commodities generally, and base metals
particularly, was the thesis that the long march towards full industrialisation of
developing countries (China being the darling of the bunch) implied a
qualitatively new paradigm for commodities, a ‘stronger-for-longer’
commodities boom. It helped that the ability to open new mines and expand
others was increasingly limited by geology, lack of skilled labour, and
environmental concerns. This super-cycle theory has, to some extent, been
thrown off course; some would argue that it has been entirely dispelled. Clearly,
China’s stunning growth owes much to its export-led economy and, hence,
reliance on consumer demand from the developed world. But although this dash
for growth has been thwarted by the West’s credit crunch, we would argue that it
will necessarily be resumed, probably sooner rather than later, simply because
the newly industrialising powers, such as China and India, are unable to halt
entirely and permanently their economic revolutions in mid-stream.
Nevertheless, the past two months will go down as the period in which
investment froth was blown off, leaving the markets to the age-old game of
assessing supply/demand fundamentals.
Analyst: Carl Firman
VM Group
Tel: +44 20 7487 3600
Email: Carl@vmgroup.co.uk
Analyst: Matthew Turner
VM Group
Tel: +44 20 7487 3600
Email: matthew@vmgroup.co.uk
Analyst: Gary Mead
VM Group
Tel: +44 20 7487 3600
Email: gary@vmgroup.co.uk
10 | Fortis metals monthly | November 2008 Fortis/VM Group
So what are the ‘new’ fundamentals for base metals? On the demand side, gloom
is inescapable right now, as growth in all things industrial seems to be flat or in
decline. Sales of light vehicles in the US fell to their lowest seasonally adjusted
annual sales rate in 25 years of 10.6m units in October, while the Institute for
Supply Management pegged the US Purchasing Manager Index (PMI) at 38.9 in
the same month – the third consecutive month in recessionary territory. The
eurozone is already in a technical recession, while the region’s growth, at the
very best, is expected to remain at a standstill in 2009, according to the
European Commission. The impact of recession on China’s two largest export
markets, the US and the EU, is expected to see its growth below 8% in Q4 2008
and Q1 2009, after falling into single digit growth of 9% in Q3 2008 for the first
quarter since 2002. China’s official PMI, according to the China Federation of
Logistics and Purchasing, dropped to 44.6 in October; anything below 50
denotes contraction. Similar contractions can be seen in Russia and Brazil, while
India is still in positive territory, albeit in decline.
New world order of demand
The issue now lies in balancing supply with the new world order of demand.
Until such time as the full impact of the financial crisis and ensuing global
recession on industrial demand is known, the supply side will be under pressure
to shed production, as low metal prices cripple operations. This will be a
continuous process until equilibrium is achieved. Should operators delay making
significant cuts to their output and expenditure, we shall see significant stock
builds that ultimately will only act to delay price recovery. We are already
seeing significant stock inflows into LME-registered warehouses for four of the
six LME metals, confirming the poor demand environment and that supply cuts
have yet to filter through.
LME base metals stocks from June 2002 (t)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
May-02 May-03 May-04 May-05 May-06 May-07 May-08
Al, Cu and Zn (t)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Ni, Pb and Sn (t)
Copper Aluminium Zinc Lead Tin Nickel
Source: VM Group
Zinc and aluminium stocks have grown by 106% and 64%, respectively, since
the beginning of the year, and by 15% and 23% since mid-September alone.
Their price has fallen by some 51% and 16% since the start of the year, and 35%
and 22% since mid-September. Conversely, and an indicator of current market
LME warehouse stocks rising fast
Aluminium Copper Zinc Tin Lead Nickel
End Oct 08 1,528,400 237,925 181,975 3,585 48,150 57,858
Mid Sept 08 1,241,150 205,325 158,025 5,300 73,100 51,540
Start 08 929,500 198,175 88,250 12,115 46,750 47,892
% chg from mid-Sept 23.1 15.9 15.2 (32.4) (34.1) 12.3
% chg first 10 months 64.4 20.1 106.2 (70.4) 3.0 20.8
Source: VM Group
Fortis/VM group November 2008 | Fortis metals monthly | 11
conditions, tin and lead stocks have depleted rapidly in the past several weeks,
yet their prices have also lost 26% and 19%, respectively. Simply put, this shows
that supply-side fundamentals are second to demand-side recession fears and the
apparent slowing of the Chinese growth story.
Numerous mineral projects are now being delayed and mine production cuts
imposed across many base metals operations. We estimate some 630,000t/y of
copper supply is currently under threat of outright production cuts, project
delays or increasingly complex mining related issues. Some 1.7 Mt/y of
aluminium production has already been lost, as is at least 775,000t/y of zinc and
70,000t/y of lead. For nickel, we anticipate huge current and future supply losses
of up to 300,000t/y, as miners cut or delay high cost projects and juniors are
frozen out by the lack of available capital. Even tin, which currently has
historically low LME stocks and tight supply, is expected to shed 10,000t/y of
production in the short-term. These declines in base metals’ output may be
merely the tip of the iceberg, as the global recession continues to eat away at
demand.
With the demand picture faltering month by month, metal prices and input costs
are the major determinants of the rapidity and scale of production cuts, while the
state of the capital markets will also influence which mineral exploration
projects are shelved and which will survive. The impact to present and future
output may be significant. As can be seen from the last mining slump, in the
1990s, the industry does have a tendency to over compensate, leading to supply
shortfalls well after demand has recovered. As noted above, this was part of the
argument, along with the emergence of China, which fuelled the commodities
boom in the first place, as supply traditionally takes time to come on stream.
New sources of metals are crucial in replacing ageing supply; however, the key
to funding mining exploration is long-term finance and this has disappeared as
capital has run dry. No new funds were raised on London’s Alternative
Investment Market in Q3 2008 and only £128m ($204m) was raised in
secondary issues. As a major centre for junior mineral exploration, this position
on AIM is perhaps indicative of what lies ahead, with many projects delayed as
miners hoard cash or suspend ventures. We are certain that, in the long-term, this
will lead again to tight metals markets and tempt prices back to pre-Q3 2008
levels, especially as China will eventually resume its progress to rapid industrial
development.
The first step to any price recovery will be a demand recovery – most obviously
the easing of monetary policy, as is happening already across the world to try
and stimulate economic recovery and hence demand. Fiscal boosts, the latest
being China’s 4 trillion yuan ($586bn) package, will also help. These will
however take time to feed through into the real economy. In the meantime, base
metals supply will have to take some of the strain. This is where miners and
refiners will be under extreme pressure and only the most efficient and cost
effective operations will survive. However, the picture is complicated and
dynamic, as costs of production are falling, as a consequence of lower input
LME base metals - three month prices
Aluminium Copper Zinc Tin Lead Nickel
End Oct (ask $/t) 2,010 3,990 1,130 13,620 1,472 11,505
Mid Sept (ask $/t) 2,571 6,820 1,730 18,525 1,815 18,005
Start 2008 (ask $/t) 2,405 6,715 2,331 16,500 2,532 26,050
% chg from mid-Sept (21.8) (41.5) (34.7) (26.5) (18.9) (36.1)
% chg first 10 months (16.4) (40.6) (51.5) (17.5) (41.9) (55.8)
End Oct price last seen in Mid-05 Late 2005 Early 2005 Early 2007 Late 2006 Early 2004
Nominal record ($/t) 3,380 8,940 4,535 25,450 3,890 51,800
Nominal record set in Jul-08 Jul-08 Nov-06 May-08 Oct-07 May-07
Source: VM Group
12 | Fortis metals monthly | November 2008 Fortis/VM Group
costs such as oil, freight rates, steel prices, reagent prices and exchange rates
against the dollar, such as the Australian dollar, Brazilian real and South African
rand.
Short-term outlook
Aluminium
We estimate up to 17 Mt of aluminium production is cash negative at current
prices of around $1,900/t including up to 60% of Chinese output (8 Mt/y). The
major variables here are input costs such as the alumina price and energy costs.
Alumina costs have tumbled to $315/t as a surplus has developed on lower
demand, while lower energy costs will take time to work their way into smelters’
cost structure outside of China. In China, approximately 1 Mt of aluminium
production has already been cut since this crisis started. More cuts will follow.
But announced cuts in production to date would be more than offset by
previously planned production growth such as the ramp-up of Alcoa’s Fjardaal
smelter in Iceland, numerous Chinese initiatives and Eastern European and
Russian growth. Our short-term downside price, therefore, is $1,750/t.
Copper
Copper is more or less trading within its upper 90th centile of C1 operating costs
(>$3,200/t), representing about 1.8 Mt/y of production capacity. Mine costs will,
however, receive some benefit from falling energy prices and freight rates, but
co- and bi-product credits will also be squeezed, with little or no adjustment in
treatment and refinement charges due to the nature of the contracts. About
210,000t/y of copper output has been cut so far this year and a further 420,000t/y
of future output delayed. Despite rising stock levels, we feel that copper should
weather the recession fairly intact, as its long-term fundamentals are robust. Our
short-term downside price limit is $3,200/t.
Zinc
Zinc’s long-term outlook is starting to look promising, as ageing mines reach the
end of their operational life and replacement operations are limited. But
currently it is one of the worst fundamentally, with growing inventories and a
growing supply-surplus. Prior to mid-September, operations were already
cutting output or being put on care and maintenance. Since then, a further
650,000t/y has been cut and a further 50% of the 12 Mt/y market put at risk.
Offsetting the weak price is the weakening of currencies in producing countries
against the dollar. Moreover, some of the burden of low market prices has been
partly shared with refiners, through the price participation clause in treatment
charge contracts. According to the International Lead and Zinc Study Group
(ILZSG) in October, the zinc market was expected to be in surplus of 150,000t
this year and 330,000t in 2009. We feel this surplus could be higher and expect a
short-term downside price floor of $950/t.
Lead
Lead is by and large a by-product of zinc and therefore is fairly reliant upon the
zinc story. The ILZSG forecasts lead to be in a surplus of 30,000t this year and
near balance in 2009. With falling LME stocks, lead looks fairly robust at the
current price, especially with cuts in world zinc supply. Our short-term
downside price floor is $1,100/t.
Nickel
Nickel’s fate is tied closely with that of stainless steel, which has shed
production due to weak demand. Given that we expect nickel to be in a global
surplus of 35,000t this year and 100,000t in 2009, nickel’s fundamentals look
very poor – except that some very big nickel projects, as well as numerous
junior mining projects, now look extremely vulnerable, and this will reduce
existing and expected supply. In addition, LME stocks are at a nine-year high.
We predict mine production cutbacks of up to 400,000t/y, which may just be
enough to prevent the price collapsing further. Our short-term price floor is
$8,500/t.
Fortis/VM group November 2008 | Fortis metals monthly | 13
Nickel stocks and three month price
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
03/01/89 03/01/92 03/01/95 03/01/98 03/01/01 03/01/04 03/01/07
0
10,000
20,000
30,000
40,000
50,000
60,000
Nickel stocks (t) 3M price ($/t)
Source: VM Group
Tin
Of all the base metals tin currently remains relatively impervious to the
generalised sell-off, largely because of extremely tight fundamentals. Tin’s
largest producers – China and Indonesia – have both cut output in an already
tight market, while tin output from the Democratic Republic of the Congo is at
risk due to the resurgence of serious fighting in its mining region. What with
LME stocks at 2004 levels and a forecast 20,000t supply deficit this year, tin is
the strongest base metal fundamentally. We believe this will offer a strong shortterm
price floor of $12,500/t.
Long-term outlook
In the past two months we have seen the annihilation of base metals’ prices and
a sizable shutdown in output and mineral exploration. In the short-term,
continued output cuts will be announced and – depending on how many of the
announcements actually translate into real, enduring production cuts – this will
help to set a price floor. But that floor will only be stable so long as demand
does not collapse even further. No one really knows the severity of the coming
recession, but most recent data suggests it will be worse rather than better than
expectations.
This could mean, in some cases, double-digit slumps in demand for metals such
as aluminium, copper, nickel and zinc, and production cuts to date seem to lag
well behind this. We therefore see inventories continuing to build and dampen
price recovery ahead. However, stocks, apart from aluminium and nickel, are
still at relatively low levels historically; any appreciable return to 2007 demand
levels will quickly see these depleted, especially as it will take time for curtailed
output to come back on stream. In addition, the delay or suspension of mineral
exploration projects, which are crucial to support industrial demand in the longterm,
will lead to tightness ahead. This we believe will be a defining factor in the
upswing of metals prices from 2010, as we feel confident that China and other
leading developing economies will quickly recover and grow to pre-recession
levels. By which time, if investors are still interested, prices could move higher
quite rapidly.
14 | Fortis metals monthly | November 2008 Fortis/VM Group
Focus - Commodity index rebalancing
Summary
• The two commodity indices with the largest amount of fund money linked to
them, the S&P GSCI and the DJ-AIG, will rebalance their holdings in early
January. This will involve the purchase and sale of futures contracts.
• Based on current prices, we expect the changes will be relatively small for
most commodities. As a % of open interest the commodity to see the largest
sale is lean hogs, with 20,703 contracts sold equivalent to 12% of open
interest, followed by live cattle at 8%, and sugar at 7%. The largest purchase
is Comex copper at 21% of open interest (16,780 contracts); however, as a
guide to market impact, this might be overstated due to the extra copper
market liquidity afforded by the LME contract (which will see a tiny
rebalancing). Next largest purchase will be LME nickel at 9% of open
interest, followed by LME zinc at 6% of open interest.
• These forecasts will change between now and early January in line with
changing relative prices and the number of contracts held by the indices.
Given the volatility of prices in recent months this implies greater uncertainty
for these forecasts than in previous years.
Background
The announcement last week by S&P GSCI of the new contract production
weights (CPWs) for their market-leading GSCI index, following on from
August’s publication of the Dow-Jones AIG Index’s 2009 target weights, means
we now have a reasonable idea of what the two main commodity indices
rebalancing will mean when it happens in January 2009.
To recap, as commodity indices purchase futures, and the data (at least for the
agricommodities) from the Commodity Futures Trading Commission (CFTC) in
the US shows that these can account for up to half of the open interest in those
markets – of which we estimate these two indices probably account for 90% –
then this rebalancing will have a direct and immediate impact in early January
on the volume of contracts bought or sold in the commodities contained in their
Combined impact of the S&P GSCI and Dow-Jones AIG rebalancing
Exchange Contract GSCI DJ-AIG Total AS % O.I.
CME Lean hogs 744 (21,446) (20,703) (12%)
CME Live Cattle 3,118 (20,749) (17,632) (8%)
ICE Futures US Sugar (816) (42,186) (43,002) (7%)
ICE Futures US Coffee (405) (5,257) (5,662) (4%)
KBCT Wheat KBOT (2,596) (2,596) (3%)
NYMEX Gold (783) (4,167) (4,951) (2%)
NYMEX Corn 1,403 (15,927) (14,524) (1%)
COMEX Natural Gas (2,298) (10,280) (12,579) (1%)
CBOT Heating Oil (2,467) (546) (3,012) (1%)
ICE Futures UK BRT Crude Oil (4,087) (4,087) (1%)
LME Aluminium 318 (3,850) (3,532) (1%)
LME Copper (50) (50) (0%)
ICE Futures US Cocoa 73 73 0%
LME Lead 94 94 0%
ICE Futures US Gasoil 889 889 0%
CBOT Soybeans 1,141 672 1,813 1%
CME Feeder Cattle 264 264 1%
ICE Futures US Cotton 288 2,717 3,005 2%
NYMEX WTI Crude Oil 4,788 16,907 21,696 2%
CBOT Wheat CBOT 968 8,351 9,320 3%
COMEX Soybean Oil 6,605 6,605 3%
CBOT Silver (0) 4,211 4,211 4%
NYMEX RBOB 2,467 6,694 9,160 6%
LME Zinc 70 13,622 13,692 6%
LME Nickel 38 7,483 7,521 9%
COMEX Copper 16,780 16,780 21%
Source: VM Group
Fortis/VM group November 2008 | Fortis metals monthly | 15
baskets. This can obviously also impact the futures price of these commodities,
although it is conceivable that, by January 2009, the futures prices may have
already adjusted themselves, in the light of the expected rebalancing of these
indices.
It’s worth noting that these indices are not what they once were. Their assets
under management (AUM) has declined from a peak of around $200bn in early
July 2008 to at most $100bn now, according to our estimates, based on CFTC
data and other public sources. Some of this decline is due to falling commodity
prices, but so too was the increase seen in early 2008. In terms of contracts held,
the indices are probably now back at levels not seen since early 2006.
Estimated AUM of commodity indices ($ bn)
0
50
100
150
200
250
Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08
Billions
Source: VM Group
The largest index, the S&P GSCI, which we estimate has $60bn-$65bn in
AUM, announced its new weightings on 3rd November. These will be
implemented during the first ‘roll period’, which will be the between the 5th and
9th business day of January, which is the 8th-14th January. We expect the impact
on all commodities from this re-balancing will be relatively small, due to the
nature of the S&P GSCI. The weightings tend not to vary by much, as they are
chosen primarily on the basis of the average of each commodity’s production in
the five most recent years for which data is available, a calculation in which the
price prevailing in those five years does not matter. Thus the weighting of each
commodity in 2009, compared with 2008, will reflect the relative differences in
their average production between 2000-2004 and 2001-2005. Commodity
production rarely varies enormously from year-to-year, and three of the five
years being averaged will be the same; therefore the changes in weightings do
not tend to be large.1 This time around we believe the largest % change will be
in WTI crude oil, gaining 0.43% points, and Brent crude oil (BRT), losing
0.36% points. But even these, in terms of contracts compared with the size of the
overall market, are not large.
1 There is one complicating factor, concerning commodities that are ‘grouped’, such as the
energy complex. Here the volume traded affects the split among the commodities. This
doesn’t typically affect the weightings enormously, however.
16 | Fortis metals monthly | November 2008 Fortis/VM Group
S&P GSCI rebalancing estimates
Exchange Contract Weighting Change
As Nov 14th Based on 2009 CPW % point in weight If AUM = $62.5bn ($) In no. of contracts
LME Aluminium 2.79 2.81 0.02 14,958,645 318
ICE Futures UK BRT Crude Oil 12.60 12.24 (0.36) (225,519,723) (4,087)
ICE Futures US Cocoa 0.28 0.29 0.00 1,412,068 73
ICE Futures US Coffee 0.80 0.77 (0.03) (17,175,807) (405)
LME Copper 2.45 2.45 (0.01) (4,685,845) (50)
CBOT Corn 4.14 4.19 0.04 27,276,438 1,403
ICE Futures US Cotton 0.80 0.81 0.01 6,007,889 288
CME Feeder Cattle 0.55 0.57 0.02 12,335,030 264
ICE Futures US Gasoil 5.26 5.34 0.08 50,917,568 889
COMEX Gold 2.53 2.44 (0.09) (57,176,659) (783)
NYMEX Heating Oil 5.36 5.06 (0.30) (188,876,074) (2,467)
LME Lead 0.38 0.38 0.00 3,086,405 94
CME Lean hogs 1.59 1.61 0.03 18,258,132 744
CME Live Cattle 3.05 3.23 0.18 110,901,915 3,118
NYMEX Natural Gas 7.78 7.55 (0.23) (145,784,410) (2,298)
LME Nickel 0.55 0.55 0.00 2,428,949 38
NYMEX RBOB 3.50 3.71 0.21 129,409,199 2,467
COMEX Silver 0.24 0.24 -0.00 (17,168) (0)
CBOT Soybeans 2.51 2.59 0.08 50,131,249 1,141
ICE Futures US Sugar 1.56 1.54 (0.02) (10,443,351) (816)
CBOT Wheat CBOT 4.22 4.26 0.04 27,282,530 968
KBCT Wheat KBOT 1.02 0.90 (0.12) (77,328,640) (2,596)
NYMEX WTI Crude Oil 35.57 36.01 0.43 270,483,632 4,788
LME Zinc 0.48 0.48 0.00 2,055,530 70
Source: VM Group
The Dow-Jones AIG Index is the second largest commodity index by AUM,
with an estimated $30bn-$35bn in funds tracking it. It announced its new
weightings in August. These will come into force during the roll period that
begins on the 6th -10th working day of 2009, which is 9th -15th January. With the
DJ-AIG Index there is more potential for large changes than in the GSCI,
because its weightings are set not in terms of ounces/tonnes, but by dollar value
(each commodity is allocated a percentage share of the total value of the index),
based two-thirds on rolling five-year dollar value averages for liquidity (contract
volume traded), and one-third rolling five-year dollar value averages for
production. This means there are two factors behind the extent of the
rebalancing required by the DJ-AIG Index – the change in the target weighting,
and the change in the price of a commodity since the last rebalancing. The latter
factor can be large. It means that, even if the target weights of the index
remained unchanged, rebalancing would still occur, as the actual weighting
would have changed in line with relative price movements.2
We cannot know the extent of the rebalancing that will happen in the DJ-AIG
Index until we know the prevailing prices for each commodity on 7th January
2008. However, we can get an indication, by looking at current prices.3 The
following table shows each contract in the index; the start 2008 weight; our
estimate of the current weight based on current prices; the start 2009 weight; and
the rebalancing that is needed to get there, assuming current prices hold. We
2 A simple example makes this clearer. Imagine a commodity index worth $2, made up of one
unit each of two commodities, A and B, which are both worth $1. Thus the actual weighting is
50:50, which we can assume was equal to the target weighting at the start of the year. Let’s
assume that over the first year the price of A doubles to $2, whilst that of B remains the same
at $1. Now the index is worth $3, $2 of A and $1 of B. Thus the actual weighting is now 66:33
A:B. If the index wants to return to the original weighting of 1:1, it would need to sell $0.50 of
A and purchase $0.50 of B. If, however, the target weightings had been changed to (say)
60:40 for A:B, then the index would only have to sell $0.20 of A and purchase $0.20 of B to
make the actual weighting equal the target weighting. Note, however, that in this second
example the index is still selling A despite its target weighting having risen, because the actual
weighting has risen further.
3 Or one could use the current price of the contracts that the index will hold in January 2009,
but it doesn’t make much difference.
Fortis/VM group November 2008 | Fortis metals monthly | 17
have also, on the basis of an estimate that the index has $35bn of AUM, shown
the number of contracts that will be bought or sold.
Dow-Jones AIG reweighting estimates
Actual weight Target weight Change
Exchange Contract Start 2008 Nov 14th est. Start 2009 % Point in weight If AUM = $35bn ($) In no. of contracts
LME Aluminium 7.11 7.52 7.00 (0.52) (0.18) (3,850)
ICE Futures US Coffee 3 3.62 2.97 (0.65) (0.23) (5,257)
COMEX Copper 7.04 5.26 7.31 2.05 0.72 16,780
CBOT Corn 5.66 6.62 5.72 (0.90) (0.32) (15,927)
ICE Futures US Cotton 2.48 2.10 2.27 0.17 0.06 2,717
COMEX Gold 7.4 8.75 7.87 (0.88) (0.31) (4,167)
NYMEX Heating Oil 3.82 3.77 3.65 (0.12) (0.04) (546)
CME Lean Hogs 2.55 3.93 2.40 (1.53) (0.54) (21,446)
CME Live Cattle 4.89 6.44 4.29 (2.15) (0.75) (20,749)
NYMEX Natural Gas 12.24 13.79 11.89 (1.90) (0.66) (10,280)
LME Nickel 2.79 1.48 2.88 1.40 0.49 7,483
COMEX Silver 2.72 2.32 2.89 0.57 0.20 4,211
CBOT Soybean Oil 2.81 2.51 2.88 0.37 0.13 6,605
CBOT Soybeans 7.63 7.51 7.60 0.09 0.03 672
ICE Futures US Sugar 3.19 4.61 2.99 (1.62) (0.57) (42,186)
NYMEX Unleaded Gasoline 3.78 2.69 3.71 1.02 0.36 6,694
CBOT Wheat 4.7 4.11 4.80 0.69 0.24 8,351
NYMEX WTI Crude Oil 13.16 10.97 13.75 2.78 0.97 16,907
LME Zinc 3.03 1.99 3.14 1.15 0.40 13,622
Source: VM Group
Factors that could alter these findings
There are a number of reasons why our forecasts might not be completely
accurate
Prices
The calculations are made using 14th November prices; any changes between
now and 7th January 2009 will change the volume of commodities that needs to
be bought or sold. This is particularly true for the DJ-AIG, and to a lesser extent
for the S&P GSCI. The table below shows an example of this in practice. The
first column shows what our estimates for the DJ-AIG rebalancing would have
been with Sep 20th commodity prices, which is a similar time in the past as the
rebalancing date is in the future, and the the second column our estimates based
on Nov 14th. The change in many cases over that time period has been large,
e.g. we now expect 16,907 contracts in WTI crude oil to be purchased,
compared with a sale of 2,643 if we had made the forecast in mid-September.
Given the volatility of prices in recent months this issue is more important than
usual.
18 | Fortis metals monthly | November 2008 Fortis/VM Group
AUM
We have estimated the AUM of funds backing the GSCI and DJ-AIG indices on
the basis of published statements, adjusted for valuation growth and using data
from the CFTC’s Commitment of Traders’ report. Together they sum to
$97.5bn. This AUM will change between now and January 2009. If it is higher
than our current estimate, then the volume of commodities that will be bought or
sold will all be higher for each index. Also we have split the funds $62.5bn in
the S&P GSCI and $35bn in the DJ-AIG. If this proportion changes it will also
affect the combined impact of the rebalancing.
Open interest
The open interest of the commodities in the index will alter between now and 7th
January 2009.
Other commodity indices
There are numerous commodity indices for investors. Although the GSCI and
Dow-Jones AIG are by far the largest in terms of AUM, the weightings of some
particular commodities in the other indices might be considerably higher, and
thus their investment in those commodities could be relatively large.
Despite these issues, our estimates made this time last year were remarkably
accurate when matched against the data on index funds that is available, the
CFTC’s CIT report for 12 agricommodities. Only cotton and to a lesser extent
live cattle were noticeably out.
Forecast rebalancing at different prices (contracts)
Exchange Commodity End Sep-08 prices Nov 14th prices Change
LME Aluminium (175) (3,850) (3,675)
ICE Futures US Coffee (759) (5,257) (4,499)
COMEX Copper 1,149 16,780 15,631
CBOT Corn (12,250) (15,927) (3,677)
ICE Futures US Cotton 422 2,717 2,295
COMEX Gold 1,579 (4,167) (5,746)
NYMEX Heating Oil (1,903) (546) 1,358
CME Lean Hogs (7,321) (21,446) (14,126)
CME Live Cattle (7,375) (20,749) (13,375)
NYMEX Natural Gas 167 (10,280) (10,448)
LME Nickel 4,090 7,483 3,393
COMEX Silver 3,118 4,211 1,093
CBOT Soybean Oil 2,538 6,605 4,067
CBOT Soybeans 2,450 672 (1,778)
ICE Futures US Sugar (18,576) (42,186) (23,610)
NYMEX Unleaded Gasoline (750) 6,694 7,443
CBOT Wheat 9,251 8,351 (900)
NYMEX WTI Crude Oil (2,643) 16,907 19,550
LME Zinc 7,592 13,622 6,030
Source: VM Group
Fortis/VM group November 2008 | Fortis metals monthly | 19
Measuring the price impact of the rebalancing
These forecast changes are not trivial, at least the larger ones, but what evidence
is there that such rebalancing and reweighting has any real impact on prices? In
assessing this, difficulties arise for a number of reasons. First, articles such as
this one mean that the impact of the rebalancing is known sometime in advance,
so any effect might also happen before the rebalancing. Second, there are always
other factors that can outweigh the rebalancing. Third, these are estimates only
and suffer both from incomplete knowledge and also that the exact figure
depends on prices that are not known until the day of the rebalancing.
History gives us some guide, as we did this exercise in both 2006 and 2007.
Comparing our estimated size of the rebalancing in 2007 to the price movements
in each commodity over the rebalancing period, one would expect the
commodities with a positive rebalancing (without brackets in the ‘change in
contracts’) to see their price rise, and those with a rebalancing away from them
(enclosed in brackets), to see their price fall. In fact if there is a relationship it
appears to be the opposite. It is not perfect, but is especially pronounced where
the rebalancing was a major proportion of open interest, such as in nickel and
corn. In 2008 there is less of a relationship either way, with the two commodities
that saw the largest inflows falling in price, but the next two gaining. However,
given the four commodities with the largest estimated rebalancing away from
them all saw their prices gain, what relationship there is appears to be inverse to
what might be expected.
VM Group estimates of DJ-AIG and S&P GSCI rebalancing compared with CFTC CIT numbers
VM November estimate
of 2008 rebalancing
Outcome according to
CFTC index tracker position
Sugar 40,490 37,214
Corn 26,310 20,112
Lean Hogs 9,945 11,736
Coffee 5,669 6,909
Live Cattle (105) 3,283
Cotton (4,739) 2,289
Cocoa 5 61
Feeder Cattle (871) (206)
Wheat KBCT (6,759) (3,248)
Wheat CBOT (9,679) (7,875)
Soybeans (11,521) (9,568)
Soybean Oil (13,470) (10,626)
Correlation with CFTC 98.71%
Source: VM Group
20 | Fortis metals monthly | November 2008 Fortis/VM Group
One explanation for this would be if market participants ‘front-run’ changes to
the index, particularly if they are large and seem robust – that is unlikely to
change before the rebalancing day. The following table compares our
projections of the impact of the DJ-AIG rebalancing with the price movements
in the commodities over the previous two months, to see if there was any impact
once the likely impact had become known. The evidence is, again, at best mixed,
and indeed in 2008 once again seems to show more of an inverse relationship.
This however might be due to the nature of the DJ-AIG index – those
commodities which have risen in price the most tend to get rebalanced down, so
the causation could be from price gains to rebalancing away, not the other way
around. In other words when speculators see that a commodity is going to get
inflows from the commodity indices rebalancing, they bid up the prices so much
that in fact the rebalancing does not lead to an inflow.
Change in price during rebalancing period v size of rebalancing, 2007 & 2008 (%)
2007
Change in
price
(6th to 10th
working day)
Change in
contracts (%
open interest)
2008
Change in
price
(6th to 10th
working day)
Change in
contracts (%
open interest)
Sugar (1.6) 3.6 Lean Hogs (3.3) 4.5
Natural Gas 4.1 3.3 Zinc (4.4) 4.2
Unleaded Gas (6.8) 1.9 Sugar 0.2 3.2
Live Cattle (1.0) 1.6 Coffee 0.9 2.9
Crude Oil (6.0) 1.2 Nickel (0.7) 2.9
Heating Oil (4.9) 1.2 Copper (1.4) 2.5
Cotton 1.5 0.8 Silver 3.0 2.3
Coffee 1.3 0.0 Aluminium 2.2 1.6
Gold 2.8 0.0 Live Cattle (2.7) 1.2
Aluminium 4.0 (0.4) Natural Gas 1.2 0.7
Soybeans 6.5 (0.5) Corn 6.7 0.5
Silver 2.3 (1.4) Gold 2.4 0.2
Soybean Oil 2.4 (2.3) Crude Oil (3.6) (0.8)
Copper 2.0 (3.0) Unleaded Gas (5.2) (1.9)
Zinc 1.9 (3.2) Heating Oil (2.5) (2.5)
Wheat 0.0 (4.5) Cotton 3.9 (2.6)
Lean Hogs 0.5 (5.3) Soybeans 4.2 (3.5)
Corn 10.9 (5.7) Soybean Oil 5.1 (4.5)
Nickel 8.9 (6.9) Wheat 4.8 (4.7)
Source: VM Group
Fortis/VM group November 2008 | Fortis metals monthly | 21
Change in price over previous two months v size of rebalancing, 2007 & 2008 (%)
2007
Change in
price (over
past 2 months)
Change in
contracts (%
open interest)
2008
Change in
price (over
past 2 months)
Change in
contracts (%
open interest)
Sugar (3.6) 3.6 Lean Hogs (3.3) 4.5
Natural Gas (17.8) 3.3 Zinc (7.6) 4.2
Unleaded Gas (4.4) 1.9 Sugar 13.1 3.2
Live Cattle 9.3 1.6 Coffee (9.6) 2.9
Crude Oil (4.9) 1.2 Nickel (8.6) 2.9
Heating Oil (7.3) 1.2 Copper 2.6 2.5
Cotton 9.3 0.8 Silver 1.5 2.3
Coffee (2.9) 0.0 Aluminium (4.8) 1.6
Gold 6.3 0.0 Live Cattle (1.6) 1.2
Aluminium (4.2) (0.4) Natural Gas (1.6) 0.7
Soybeans 1.6 (0.5) Corn 20.6 0.5
Silver (2.9) (1.4) Gold 5.1 0.2
Soybean Oil 1.6 (2.3) Crude Oil 3.1 (0.8)
Copper (24.8) (3.0) Unleaded Gas 3.2 (1.9)
Zinc (17.1) (3.2) Heating Oil 0.4 (2.5)
Wheat (6.6) (4.5) Cotton 2.7 (2.6)
Lean Hogs (6.7) (5.3) Soybeans 21.7 (3.5)
Corn 3.6 (5.7) Soybean Oil 14.3 (4.5)
Nickel 1.7 (6.9) Wheat 16.7 (4.7)
Source: VM Group
22 | Fortis metals monthly | November 2008 Fortis/VM Group
Hedge funds activity
News
• Nov 10th: Rahm Emanuel, President-elect Obama’s selection as his chief of
staff, backed proposed legislation to prevent hedge fund managers from
deferring taxes on offshore compensation. However, according to the Centre
for Responsive Politics, Emanuel was the largest recipient of donations from
hedge funds’ employees during this election cycle, which suggests that he
may be a moderating force on what is likely to be an impetus toward greater
regulation of the industry.
Analysis
• Feeling chilly out there
The summer offered us more than just a hint that funds would be given the cold
shoulder by investors come autumn, but the extent of redemption requests and
fund liquidations has been substantial. George Soros expects the population of
funds to shrink to somewhere between half and one third of its current size
before stabilizing. Shrinking credit pools and calls for cash from investors have
put funds in a tight spot. Unable to generate sufficient cash to satisfy redemption
requests, the forced unravelling of strategies centred on illiquid assets, has left
their balance sheets sagging. While funds have been making every effort to limit
redemptions and coax investors into longer lock-up periods, with the hope that
things will eventually improve, their strategies have by no means persuaded
everyone. Around $31bn was withdrawn from hedge funds between July-
September, a relatively small share of the total $1,700bn invested. However
based on recent redemption rates, hedge funds could lose another $255bn in the
next few months.
Outlook
With all this in mind it’s no surprise that hedge funds in our database
performed poorly over September, with an average negative return of
5.7%. Hedge funds with more than 50% of their assets devoted to
commodity strategies fared slightly worse, with an average negative return
of 6.1%. Metals funds were quite a bit more resilient, with average negative
returns for September of 2.1%, still in the red but not nearly as firmly as
the Reuters/Jefferies CRB Precious Metals Index, which fell 17.68% in
September. While the longevity of hedge funds as investment vehicles has
been much debated recently, it is this kind of superior performance
compared to the indices that argues they will remain in favour with some
investors. The extraordinary background complex of a global economic
meltdown, which will shape both precious and base metals markets,
suggests that some will be tempted, with some prices this low, back into
metals’ investments. Well-managed hedge funds remain flexible and
audacious enough to thrive in the combative commodity markets we are
seeing. It is likely that the sample of commodity-oriented funds will decline
over the coming months, but those that weather the storm will emerge
strengthened, if a little battle-scarred.
Hedge fund returns by commodity weighting
(% monthly)
-8
-6
-4
-2
0
2
4
6
8
10
12
Jan-07 Jul-07 Jan-08 Jul-08
All hedge funds
All with some commodities
Funds with >50% in commodities
Source: VM Group from Barclay Hedge Fund
Database
Hedge fund returns in metals (% monthly)
-20
-15
-10
-5
0
5
10
15
20
Jan-06 Jan-07 Jan-08
-8
-6
-4
-2
0
2
4
6
8
10
Reuters-CRB precious metals
Funds with >50% in metals
Source: VM Group from Barclay Hedge Fund
Database
Fortis/VM group November 2008 | Fortis metals monthly | 23
Gold
News
• Nov 7th: Global gold hedging fell 2.3 Moz in Q3 2008, taking existing
hedging down to just 16.5 Moz, according to the Fortis Hedging and
Financial Gold Report. However dehedging rates are forecast to slow
dramatically.
• Nov 5th: Indian gold imports were 27% lower year-on-year in October,
according to the Bombay Bullion Association, recording 44t compared with
60t a year earlier.
Analysis
• Poised for a great leap higher?
October was a very disappointing month for gold bulls, as the price briefly
flirted with $900/oz on 8th and 10th October, but then collapsed spectacularly,
hitting its lowest in over a year (London afternoon fix) of $712.50/oz on the 12th.
It then managed a small rally back up to $730.75/oz by month-end, and $740-
50/oz in early November. Trading however was very volatile. Why the sudden
fall? While it’s often debated whether gold is a commodity or a currency, given
that almost every commodity saw its price collapse in October, and in the same
month almost all currencies (the yen and the yuan being notable exceptions) saw
their value fall against the US dollar, perhaps for once it is an academic exercise.
Adding to gold’s problems were clear indications that the financial aspect of the
current crisis was easing (thanks to major government intervention) – e.g. the
TED spread, which shows the difference between US Libor and Treasury bills of
the same maturity, peaked on the 10th October at 4.57%, and by 6th November
had fallen to 2.08%. As the chart shows, the price of gold in euros followed the
TED spread quite closely during October. This kind of justification for gold’s
performance of course will not wash for investors who look at it in dollars, and
who thought – and perhaps were led to think – that this was exactly the kind of
crisis in which gold would outperform not just some currencies, but all
currencies, and not just some assets, but all assets. Maybe it still will. The rate of
physical gold buying has been impressive, and supply remains constrained –
dehedging continues to fade and central bank sales are very weak. The Central
Bank Gold Agreement (CBGA) signatories, who need to sell on average
8.6t/week to hit their 500t/year limit, managed 7.8t and 7.6t in the first two
weeks of the new CBGA year (from 27th September) but almost nothing (0.05t
and 0.1t) in the following two weeks, and a net purchase of 0.05t in week five.
Perhaps when institutional investors, such as hedge funds, have stopped
liquidating their holdings, the price will gain. But it needs to do so soon to be
convincing.
Outlook
Gold is getting almost impossible to call, with daily price moves of $20/oz no
longer rare. We’re mildly bullish, as the dollar’s rally is likely to run out of
steam. But when might that be? Short-term London PM fix: $730/oz-
$820/oz.
Gold price ($/oz)
700
750
800
850
900
950
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Source: London Bullion Market Association
Comex: Non-commercial net position (tonnes)
0
100
200
300
400
500
600
700
800
Nov-06 Apr-07 Sep-07 Feb-08 Jul-08
Source: VM Group
Euro gold price and TED spread
500
520
540
560
580
600
620
640
660
680
01/09/08 23/09/08 15/10/08 06/11/08
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Euro gold price TED spread
euro/oz TED spread, %
Source: Reuters Ecowin
Market data (October unless stated)
Prices $/oz €/oz Rand/kg ETF
investment
Tonnes
holdings
Monthly
change
Lease
rates
1m 3m 6m 12m Option volatility
(end month, %)
Average 813 609 253,746 US (2) 813.7 (5.0) Average 2.14 2.39 2.18 2.08 1-month 60.50
High 904 671 291,106 UK (2) 169.9 5.8 High 2.70 2.93 2.54 2.42 3-month 48.50
Low 713 555 225,345 Aus 11.6 (0.8) Low 1.09 1.24 1.15 1.22 6-month 41.50
S. Africa 26.2 - 12-month 37.75
Swiss 92.9 28.9 24-month 37.25
India (4) 5.8 0.1
Turkish 1.3 -
Source: Prices: London Bullion Market Association, Others: VM Group Note: Indian ETF holdings calculated from rupee amounts and thus are approximations only
24 | Fortis metals monthly | November 2008 Fortis/VM Group
Silver
News
• Oct 22nd: Peru produced 309.756t of silver in September, 3.45% lower than in
the same month of 2007.
• Oct 20th: Russia’s largest silver producer, Polymetal, said it would produce
16.5-17.5 Moz of silver in 2008, down from its original forecast of 17.7 Moz.
Furthermore, due to the sharp decline in silver prices, it said it would revise
its future investment plans. This meant that in 2009, if silver fell below
$8.50/oz, it would shut some high-cost parts of its Lunnoye and Dukat
underground projects, and production would be nearer 14 Moz than the
originally forecast 20 Moz. Indeed any price under $13.50/oz would mean
less production than that forecast.
Analysis
• A glimmer of light for silver investors?
For most of October silver had a very bad time. Having ended September at
$12.848/oz, its decline appeared relentless, and by 24th October it had hit
$8.88/oz, 31.4% down on the month, and less than half the level it had been as
recently as late July. The silver/gold ratio, i.e. the number of ounces of silver
equal in value to one of gold, had widened to over 81, compared with less than
70 at the end of September. That however was silver’s nadir; since then it has
staged a relatively sprightly recovery, zipping to $10.41/oz on the London fix on
7th October, a recovery of 17.2% from its low. This outpaced gold, and took the
silver/gold ratio back to 72.
Why the bounce? One reason is that the apparent stabilisation of the financial
system and hopes for government measures to boost economies helped reduce
some of the prevailing gloom – base metals and the PGMs also recovered.
Nevertheless silver did outperform most of them during the recovery, and so
specific factors must be assumed to be at work. One might be that silver’s mine
production, always thought relatively impervious to cutbacks based on price,
might not be so strong – and Polymetal’s announcement adds weight to that –
especially with base metal operations being slashed. There’s also evidence that
some speculators believe it had started to look ‘cheap’. On Comex, silver
speculators started adding to their positions again, with the non-commercial net
long (futures and options) rising from a low of 2,976t (in the week ending 21st
October) to 3,834t by the week ending 4th November. There has been no such
movement in the ETFs as yet, but they hardly declined anyway – in fact the BGI
ETF peaked on 23rd October, and has only seen a small outflow (from 6,896t to
6,748t) subsequently.
Outlook
Silver has surprised us with its resilience, and its long-suffering investors
might be about to get the reward for their patience. But is there a point
when they’ll decide enough of their losses have been clawed back to sell up?
London PM fix: $9/oz-$11.50/oz.
Silver price (cents/oz)
850
900
950
1000
1050
1100
1150
1200
1250
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Source: London Bullion Market Association
Nymex: Non-commercial net position (tonnes)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Nov-06 Jun-07 Jan-08 Aug-08
Source: Comex
Silver lease rates since 1998 (% per annum)
-2
0
2
4
6
8
10
12
14
16
Oct-98 Oct-01 Oct-04 Oct-07
1-month 12-month
Source: VM Group from Reuters Ecowin
Market data (October unless stated)
Prices $/oz ETF offtake (tonnes)
e/oz
p/oz
Lease
rates
1m 3m 6m 12m Imports Exports
Holdings Change
Option volatility
(end month, %)
Average 10.52 7.88 6.19 Average 1.61 1.79 1.62 1.51 USA (Aug) 133,336 147,261 US 6850 (3) 1-month 91.00
High 12.28 8.87 6.94 High 2.20 2.42 2.34 2.01 Japan (Sep) 334,376 7,581,028 UK* 443 20 3-month 76.00
Low 8.88 7.04 5.53 Low 0.85 0.96 0.87 0.98 China (Sep) 549,218 111,232 Swiss 885 30 6-month 64.00
12-month 52.50
24-month 50.00
Source Price: London Platinum and Palladium Market, Others: VM Group * Includes 'basket' ETF
Fortis/VM group November 2008 | Fortis metals monthly | 25
Platinum
News
• Oct 23rd: Refined platinum output at the world’s largest miner, Anglo
Platinum, was 685,000 oz, 11% lower in Q3 2008 than Q3 2007, but 9%
higher than in Q2 2008. The company said that, due to current depressed
prices, all capital projects were under review.
Analysis
• Falling demand and supply
Platinum had a miserable time for much of the second half of October, as
attention switched from the near-term financial crisis to a potential economic
slump. Fixing in London at $1,032/oz on 14th October, by 27th October it had
plummeted to $763/oz, its lowest since November 2003. From there it rallied,
closing on the 5th November at $870/oz; however this was a lacklustre rally
compared to that of palladium. The problem is demand, and particularly in what
has become a direly gloom-ridden global market for new car sales. A hoped-for
(if not strongly expected) autumn recovery in the US market didn’t happen, but
for platinum it is Europe, where diesel and hence platinum catalysts are
predominant, which is most concerning. EU car sales fell by nearly 15% yearon-
year in October, and for 26 European countries where we have individual
data every single one saw deterioration in the year-on-year performance except
Austria and Poland.
On the supply side, there was a reminder that platinum is heavily dependent on
supply from South Africa and that this is liable to unexpected disruptions
coming as if from no-where. This was seen when Anglo Platinum closed down
their Polokwane smelter on 5th November, due to the furnace run-out coming
into contact with rainwater. Subsequently the company said it could lose
150,000-200,000 oz of refined platinum production as a result of the smelter
shut down, from a forecast total of 2.4 Moz. This is a very large amount of
platinum, and indeed seems a high loss given it is already November, and the
smelter’s capacity of 650,000t of concentrate per annum is only 20% of Anglo’s
total smelting capacity of 3.5 Mt. Nevertheless, if this is the outcome it is
supportive of the market.
Outlook
Platinum has seen the largest ETF sell-off of any of the precious metals, and
this continued in October. The UK ETF saw its holdings fall from more
than 200,000 oz at the start of month to 136,409 oz by the end. It’s not
surprising investors are losing faith – not only are car sales collapsing but in
lean times cheaper palladium must seem an ever-more enticing option
where possible. However, South African supply remains a risk and, with
much of the investment money now out of the market, modest gains could
be possible if there are signs of further problems, or indeed if the economic
gloom starts to lift. Short-term London fix: $800/oz-$950/oz.
Platinum price ($/oz)
750
800
850
900
950
1,000
1,050
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Source: London Platinum & Palladium Market
Nymex: Non-commercial net position (ounces)
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Nov-06 Jun-07 Jan-08 Aug-08
Source: Reuters Ecowin
European car sales*, year-on-year change (%)
Sep yoy Oct yoy
Iceland (48%) (86%)
Spain (32%) (40%)
Estonia (24%) (34%)
Norway (9%) (28%)
Lithuania (8%) (24%)
Sweden (6%) (24%)
UK (21%) (23%)
Denmark (10%) (22%)
Italy (6%) (19%)
Hungary (4%) (16%)
Finland 0% (8%)
Germany (2%) (8%)
France 8% (7%)
Belgium 5% (7%)
Greece (3%) (7%)
Source: VM Group from industry sources
* Worst performing markets in October
Market data (October unless stated)
Prices $/oz Lease rates 1m 3m 6m 12m Trade (kg) Imports Exports ETF offtake (oz)
*ETF
Securities
ZKB
Option volatility
(end month, %)
Average 921 Average 0.9 1.6 1.7 2.1 USA (Aug) 502 173 Sep-08 199,569 286,376 1-month 63.00
High 1,032 High 1.7 2.2 2.5 3.0 Japan (Sep) 7,695 2,205 Oct-08 136,411 242,508 3-month 55.50
Low 763 Low 0.3 1.0 1.1 1.6 Switzerland (Sep) 5,969 8,645 6-month 50.75
China (Sep) 3,034 7 12-month 46.75
24-month 44.25
Source Price: London Platinum and Palladium Market, Others: VM Group *ETF Securities includes platinum held in 'basket' ETF
26 | Fortis metals monthly | November 2008 Fortis/VM Group
Palladium
News
• Nov 4th: US car and light truck sales in October were an annualised 10.519m
units. This was 34% below October 2007’s level, and the lowest since
February 1983. At that date sales were recovering from a low of 8.85m units
in December 1981.
• Oct 21st: North American Palladium announced the temporary closure of its
Lac des Iles Mine in Ontario, due to weak palladium prices.
Analysis
• Palladium gains; outperforms platinum
Last month we suggested that although the outlook for palladium was gloomy, it
was possible that, with the price plummeting below $200/oz, “the bears had got
ahead of themselves.” The bears had more in them yet, and the price by 15th
October hit $167.50/oz at the London fix, its lowest since the dark days of 2003.
Then the price rallied briskly, and by 6th November it had hit $233/oz, its highest
in over a month. In so doing it easily outpaced platinum, as the chart shows.
What caused this rally? The shutdown of Anglo Platinum’s Polokwane smelter
surely helped, but given that palladium moved more than platinum, and that the
rally began before that news reached the market, it hardly seems the main factor.
Certainly it was not due to better news about car sales – the crucial US market
continued to worsen in October, while parts of Europe are even sicklier. There
was some brighter news from China however, with sales returning to year-onyear
growth after two months of decline, but at 8.37%, or 42,000 additional
units, it hardly compensates for the US slump.
Swiss trade data was interesting. It showed that in September just over 1 Moz of
palladium was imported into Switzerland from Russia. Normally this would be
very bearish indeed – this follows on 333,084 oz in August, and suggests
Russian stock sales this year will be as high as ever, dashing earlier hopes that
they were slowing. However, September also saw a huge export of 532,192 oz to
the United Kingdom, suggesting metal on its way to a car company, and thus
perhaps some sort of deal had been made on the back of low prices. Certainly
the way both PGMs markets collapsed hints that car companies had simply
stopped buying and were working through stocks, and perhaps now are entering
the market again.
Outlook
It’s unquestionable that the global car market is in a mess, and this is not
good for palladium. But many of the investor longs have quit and, with
supply being cut and low prices tempting buyers back, the outlook is not all
doom and gloom – at least, not forever. Short-term London fix: $190/oz-
$250/oz.
Palladium price ($/oz)
160
170
180
190
200
210
220
230
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Source: London Platinum & Palladium Market
Nymex: Non-commercial net position (ounces)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Nov-06 Jun-07 Jan-08 Aug-08
Source: Reuters Ecowin
Palladium outperforms platinum (1st Oct = 100)
60
70
80
90
100
110
120
130
140
150
160
01-Sep 21-Sep 11-Oct 31-Oct
Palladium Platinum
Source: Reuters Ecowin
Market data (October unless stated)
Prices $/oz Lease ETF offtake (oz)
rates
1m 3m 6m 12m Trade (kg) Imports Exports
*ETF
Securities
ZKB
Option volatility
(end month, %)
Average 184.6 Average 0.16 0.57 0.57 0.76 USA (Aug) 678 487 Sep-08 240,625 427,604 1-month 64.00
High 201.5 High 1.37 1.67 1.68 1.69 Japan (Sep) 349 1,449 Oct-08 231,915 469,400 3-month 58.00
Low 165.5 Low (0.50) (0.19) (0.05) (0.01) Switzerland (Sep) 31,925 22,908 6-month 53.00
China (Sep) 1,687 0 12-month 48.25
24-month 44.50
Source: London Platinum and Palladium Market, Others: VM Group *ETF Securities includes platinum held in 'basket' ETF
Fortis/VM group November 2008 | Fortis metals monthly | 27
Aluminium
News
• Nov 10th: Rio Tinto Alcan is reviewing a $10.6bn aluminium joint venture
with Saudi Arabian state-controlled miner Ma’aden. This may lead to a delay
of 1-2 years.
• Nov 9th: Dubai Aluminium Company (Dubal) plans to increase production to
1 Mt in 2009, up 4% from this year, but is considering a review due to the
global financial crisis.
• Nov 6th: Chalco idled 38% (4.1 Mt/y) of annual alumina capacity in response
to lower prices and weaker aluminium demand. The move follows numerous
cuts by other high-cost aluminium and alumina producers in China.
• Nov 3rd: United Company Rusal suspended production at the Zaporozhye
Alumina and Aluminium Complex in the Ukraine, due to high power costs.
The complex produces 113,000t/y of aluminium and 265,000t/y of alumina.
Analysis
• Will output cuts support the price?
Three-month LME aluminium is down 22% to around $1,900/t since mid-
September, and we estimate some 17Mt/y of capacity is consequently operating
at a loss. Further price falls will put more production capacity at risk until
sufficient output is shed to match demand. Production cuts have already begun
in the US, Russia, China and Brazil, which we estimate will wipe out 1.7 Mt/y
from Q4 2008 onwards. It remains to be seen whether producers will react fast
enough to avoid a huge surplus in Q4 2008 and the early part of 2009, and avoid
huge inflows into inventories. It is evident there is already a ramp-up of metal
into LME and SHFE warehouses, with more than 7,900t added on average each
day since ‘Lehman’s Day’ on 14th September. This contrasts to 3,100t per day in
the year to end-October, and 826t per day in 2007. We feel this is inescapably
negative for the short to medium-term price outlook, and will substantially delay
any price recovery ahead. There may be some cost relief from falling
metallurgical grade alumina prices (down approximately $100/t in past two
months to $315/t) and lower energy input costs, but the latter will take time to
filter through to smelters. Oil has fallen quite dramatically in the past two
months and having dropped below $60/barrel this will help reduce aluminium
production costs – but the Organisation of Petroleum Exporting Countries
(Opec) currently seem determined to maintain oil at around $80/barrel.
Outlook
Looking back at previous recessions, global aluminium demand can slip
anywhere between a few percentage points to 8%. This means the world
may require up to 3.5 Mt less aluminium than it did previously, and global
cars sales certainly seem to indicate a hard fall – US sales were 34% lower
year-on-year in October. Government economic stimulation packages have
come fast and furious but these will take time to feed through into where
they are needed – persuading consumers to feel confident again. Short-term
LME 3-month price: $1,800/t-$1,950/t.
LME aluminium price ($/tonne)
1,800
2,000
2,200
2,400
2,600
2,800
1-
Oct
11-
Oct
21-
Oct
31-
Oct
10-
Nov
Cash 3-month
15-month 27-month
Source: Reuters Ecowin
LME aluminium stocks (tonnes)
800,000
900,000
1,000,000
1,100,000
1,200,000
1,300,000
1,400,000
1,500,000
1,600,000
Nov-07 Mar-08 Jul-08 Nov-08
Source: Reuters Ecowin
Aluminium and oil price in 2008 ($/t and $/b)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
00 01 02 03 04 05 06 07 08
0
20
40
60
80
100
120
140
160
Aluminium Oil Price
Source: Reuters Ecowin
Market data (October unless stated)
Prices
($/t)
Cash 3-month 15-month 27-month LME stocks Tonnes Prod (kt) August September LME Open Interest
(contracts), latest
Average 2,131 2,190 2,374 2,508 Sep-08 1,376,600 Europe 784 760 Aluminium 677,650
High 2,376 2,427 2,605 2,730 Oct-08 1,528,400 Americas 715 690
Low 1,874 1,930 2,112 2,248 Asia 334 324
China 1,190 1,156
Other 341 329
Total 3,364 3,259
Source: London Metal Exchange, except Production: International Aluminium Association
28 | Fortis metals monthly | November 2008 Fortis/VM Group
Copper
News
• Nov 15th: TEAL Exploration said it would scale down output at its Lupoto
copper mine project in the Democratic Republic of the Congo.
• Oct 31st: BHP Billiton will complete the first of five stages of expansion at its
Olympic Dam mine in South Australia by 2013, lifting its copper production
capacity by 11% to 200,000t/y.
• Oct 30th: Chilean copper output tumbled 10.3% to 429,309t in September
from a year earlier, its third consecutive monthly fall. Output from January to
September this year fell 3.1% from the same period last year, to 3.99 Mt.
• Oct 29th: Chile’s state copper commission, Cochilco, trimmed the country’s
2008 copper output forecast for the second time since July, this time to
5.45Mt, citing not slumping prices for the metal but operational issues.
Analysis
• How far can it fall?
The near-term copper price outlook looks its weakest for many years. With
rapidly rising LME stocks and a price above the cash costs of only the most
expensive producers, further price declines are necessary to encourage more
output cuts, which are probably necessary to bring about a solid sense that
copper has reached bottom. To date, we estimate about 630,000t/y of global
capacity has been earmarked for suspension or delay. But to put about 10% (or
1.8Mt) out of action, we think prices may need to as low as $3,200/t. If this
recession turns out to be as dire as that in the early 1970s, when copper demand
plummeted about 9% over two years, then further price falls to sub $3,000/t may
be unavoidable.
In its preliminary data for July 2008, the International Copper Study Group
(ICSG) estimated world refined usage growth in the year to July was 10.48 Mt,
up 2.3% compared with the same period in 2007. Notably, copper usage in the
EU15 and US declined 5% and 6.8% year-on-year, respectively. This contrasts
markedly with the ICSG’s original 2008 forecast, where it pegged global copper
demand growth at 3% for the year. If copper usage was only 2.3% higher to
July, when the world economy had yet to stumble into darkness, what might the
months from August to December bring? The ICSG predicts a surplus this year
of 109,000t, which will widen further in 2009 and 2010. This is not good for
copper in the short to medium-term.
Outlook
Our argument to date has been that copper will eventually succumb to the
recession, as its greatest supporter, China, would begin to feel the effects of
the global economic slowdown. That is now proving the case, with Chinese
GDP growth falling from double digits to 9% in Q3 2008, and forecast to
fall another percentage point or two in Q4 2008 and Q1 2009. Support has
been removed and hence the spectacular crash in the copper price to
$3,500/t levels. With such large stock inflows to exchange warehouses, poor
demand support and, as yet, insufficient supply cuts, the price trend is
down. Short-term LME 3-month price: $3,300/t-$3,700/t.
LME copper price ($/tonne)
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Cash 3-month
15-month 27-month
Source: Reuters Ecowin
LME copper stocks (tonnes)
100,000
150,000
200,000
250,000
300,000
Nov-07 Mar-08 Jul-08
Source: Reuters Ecowin
Implied Chinese copper consumption (tonnes)
-100,000
0
100,000
200,000
300,000
400,000
500,000
600,000
Aug-06 May-07 Feb-08
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
Copper consumption
% change year-on-year
Source: Reuters Ecowin
Market data (October unless stated)
Prices ($/t) Cash 3-month 15-month 27-month LME stocks Tonnes LME Open Interest
(contracts), latest
Average 4,990 4,940 5,017 5,045 Sep-08 199,050 Copper 280,953
High 6,379 6,360 6,345 6,275 Oct-08 237,925
Low 3,686 3,708 3,830 3,920
Source: London Metal Exchange
Fortis/VM group November 2008 | Fortis metals monthly | 29
Nickel
News
• Nov 5th: Sumitomo Metal Mining delayed the start of its Taganito nickel
project in the Philippines to explore the possibility of securing materials and
labour at lower costs.
• Oct 30th: Australian miner Mincor Resources expects production of nickel ore
to be in a range of 16,000-19,000t in fiscal 2009, down from an original plan
of 19,500-20,500t.
• Oct 29th: Nickel production at the Ravensthorpe mine in Australia will rise to
7,000t in the current half, owner BHP Billiton Ltd said. The mine is one of
the largest nickel-making facilities in the world.
• Oct 20th: China produced 103,567t of refined nickel in the first nine months
of 2008, up 12.1% from a year earlier, according to the National Bureau of
Statistics.
Analysis
• Rocky times ahead
The nickel price is now at 2004 levels, after losing 80% of its value since March
2008. LME stocks are at a nine-year high and mounting, and the bottom has
fallen out of the stainless steel market. A huge supply response is called for, and
producers have now begun to oblige, with some 90,000t/y likely to be cut in
2009. This will not be enough to avoid a 30,000t surplus this year and a large
110,000t surplus next year, according to the International Nickel Study Group
(INSG), or to erode growing stock levels. The INSG estimates production of
1.41 Mt and usage of 1.38 Mt this year, and 1.55 Mt of production and 1.44 Mt
of usage in 2009. This is just 120,000t shy of the group’s 2007 usage estimate
and could prove optimistic.
The stainless steel sector is still by some margin the single largest end-use sector
for nickel (about 62%), and its short to medium-term demand profile is weak.
European stainless steel output is expected to come in 6.2% lower year-on-year,
at 7.6 Mt this year and less than 7 Mt in 2009, while global stainless steel
production this year and next is likely to be 27.2 Mt and 26.3 Mt, respectively,
against 28.4 Mt in 2007. Another, and more damaging long-term downside risk
to nickel is that stainless steel producers are still considering removing their
exposure to the nickel price by driving research and development into ferritic
and duplex stainless steel grades, which contain very little or no nickel at all.
Outokumpu in October said: “The company has strong confidence in the longterm
growth of duplex and ferritic grades and is committed to developing these
markets.” So not only are nickel’s short and medium-term prospects poor, but its
long-term use in stainless steel remains questionable.
Outlook
With LME nickel stocks at such high levels, a growing market surplus,
insufficient producer response to date, and dire stainless steel demand, we
fear nickel’s days are numbered as the elite base metal. Should a large
amount of production be cut immediately, the price may still hold at a
respectable level. Short-term LME 3-month price: $9,500/t-$11,000/t.
LME nickel price ($/tonne)
8,000
10,000
12,000
14,000
16,000
18,000
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Cash 3-month
15-month 27-month
Source: Reuters Ecowin
LME nickel stocks (tonnes)
40,000
45,000
50,000
55,000
60,000
65,000
Nov-07 Feb-08 May-08 Aug-08
Source: Reuters Ecowin
Nickel price in nominal and real terms ($/t)
0
10,000
20,000
30,000
40,000
50,000
60,000
57 67 77 87 97 07
Price today Nominal Price
Source: VM Group from Reuters Ecowin
Market data (October unless stated)
Prices ($/t) Cash 3-month 15-month 27-month LME stocks Tonnes LME Open Interest
(contracts), latest
Average 12,156 12,358 13,005 13,466 Sep-08 56,034 Nickel 86,950
High 16,000 16,175 16,750 17,000 Oct-08 57,858
Low 8,810 9,000 9,615 10,050
Source: London Metal Exchange
30 | Fortis metals monthly | November 2008 Fortis/VM Group
Lead and zinc
News
• Nov 14th: China’s Huludao Zinc Industry Co Ltd halts 105,000t/y of
production capacity.
• Oct 30th: Australian miner Kagara cut its 2008-2009 zinc production target by
12.5%, citing “difficult times” caused by the dramatic price drop.
• Oct 29th: The Doe Run Company said it would close one of the two furnaces
at its Herculaneum lead smelter in Missouri.
• Oct 21st: A full or partial closure of the Century zinc mine in Australia, the
world’s second largest, is being considered as zinc prices continue to fall.
• Oct 13th: The International Lead and Zinc Study Group (ILZSG) expects the
global lead market to be in a small surplus of 30,000t this year and balanced
in 2009. Zinc is expected to be in surplus of 150,000t in 2008 and widen to
330,000t in 2009.
Analysis
• Lead to benefit from zinc’s woes
Lead and zinc are currently on opposites sides of the fence. The short-term
fundamentals for the former are strong, whereas the latter’s are extremely poor.
Lead has acted as a good barometer of the fear factor in the past two months
because, despite falling stocks and small or close to balanced supply/demand
fundamentals, its price has nevertheless only fallen by 19%, to trade within
$1,300/t-$1,500/t in November. It fell to $1,145/t in late October before rallying.
Importantly, the metal’s high season has arrived with demand increasing from
the fairly well insulated replacement battery sector. Moreover, supply has been
shed, as lead is generally sourced as a by-product of zinc mining, which has seen
massive production cuts and mine closures in the past few months. We feel lead
will remain in deficit for the remainder of this year and are positive on the
metal’s price strength in the short-term.
We are not, however, convinced by zinc. There will need to be more production
cuts and closures to avoid a huge supply surplus ahead, as demand declines
sharply in the world’s construction and vehicles sectors. We estimate more than
775,000t/y of zinc has been cut to date. But weakening currencies against the
dollar in the world’s largest zinc producing countries and price participation
clauses in treatment charges contracts has lowered zinc’s cost curve and
therefore may slow producer response.
Outlook
We continue to expect lead-acid batteries to support the lead price despite
the slowdown in new car sales. People will simply keep their older cars,
which are more prone to battery failure. Lead will also be supported by zinc
mine closures and cutbacks, which we predict will continue. Zinc could be
heading for sub $1,000/t levels, last seen in 2004. Fundamentally, the world
is awash with zinc as demand falters and supply is responds slowly. We are
still positive on zinc in the long-term, as many large mines reach the end of
their operational lives and little is scheduled to replace them. Short-term
LME 3-month prices: lead $1,300/t-$1,400/t, zinc $1,000/t-$1,200/t.
LME lead price ($/tonne)
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Cash 3-month 15-month
Source: Reuters Ecowin
LME zinc price ($/tonne)
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Cash 3-month
15-month 27-month
Source: Reuters Ecowin
LME stocks (Jan. 1st 2004 = 100)
0
10
20
30
40
50
60
70
80
90
100
Nov-07 May-08 Nov-08
Lead Zinc
Source: VM Group from LME
Market data (October unless stated)
Prices ($/t) Cash Cash 3-month 3-month LME stocks LME Open Interest (contracts), latest
Lead Zinc Lead Zinc Lead Zinc
Average 1,479 1,319 1,492 1,351 Sep-08 64,100 155,025 Lead 81,518
High 1,806 1,647 1,830 1,666 Oct-08 48,150 18,950 Zinc 237,607
Low 1,140 1,062 1,165 1,096
Source: London Metal Exchange
Fortis/VM group November 2008 | Fortis metals monthly | 31
Tin
News
• Nov 7th: Indonesia’s trade ministry put the country’s tin exports at 4,439t in
October, a 67% fall from 13,508t in the same month a year ago.
• Oct 27th: China set new qualifications for tin exporters as part of efforts to
tighten sales overseas. The country has cut its 2009 tin export quotas by 30%
from this year. China’s exports of refined tin and alloy in the first nine
months of the year fell 97.9% from a year earlier, to just 436t.
Analysis
• Strong fundamentals
Supply-side constraints proved a strong support in October and early November,
with the price falling just over 8% from mid-September. Although it slid with
the other base metals on recessionary fears, the announced cutbacks by the two
top tin producers – China and Indonesia – and violent unrest in the tin ore
(cassiterite) producing eastern North Kivu Province in the Democratic Republic
of the Congo (DRC) proved a decisive price floor. LME tin stocks are also at
extremely low levels, representing just three days of global consumption.
It is the nature of the supply-side risks that sets tin apart from other base metals.
Both Indonesia and China have effectively turned off the tap. Indonesia’s tin
exports have collapsed, as small independent smelters on the Bangka-Belitung
Islands have shut up shop on lower prices. Despite the tin price rising and then
consolidating in early November, these smelters will stay closed until January at
least. In the year to October, Indonesia exported 79,974t of refined tin. This
compares with 78,744t in 2007 and 121,172t in 2006, since when government
clampdowns on illegal tin ore mining on the Bangka-Belitung Islands and export
quotas were imposed. Indonesia’s two biggest producers – PT Koba and PT
Timah – have also reduced output. China became a net importer of refined tin in
August 2007 due to high domestic demand from its electronics industry, where
the metal is used in lead-free solders. China’s top producer, Yunnan Tin, has
also announced it will cut its output by 30% in Q4 2008. To cap it all, fighting in
the North Kivu Province in the DRC threatens to disrupt tin ore production,
while the government intends to impose a ban on ore exports from January 2009
in the provinces of North Kivi, South Kivu and Maniema in an attempt to give a
shot in the arm to its fledgling processing industry. However, we believe this
will incur a loss of tin to the global market, as the DRC simply does not have the
concentrators or infrastructure.
Outlook
The supply-side is tight. The market is expected to be in deficit this year
and stocks are at extremely low levels. The market is dominated by two
producing countries, which are ensuring the tin market stays tight.
Sentiment for tin plate is positive, as sales of cheaper canned food have
benefited from the economic turmoil. Of course all of this could be
disregarded as markets fear a depression, but otherwise tin is one of the
most positive metals. Short-term LME 3-month: $13,500/t.
LME tin price ($/tonne)
10,000
12,000
14,000
16,000
18,000
1-Oct 11-Oct 21-Oct 31-Oct 10-Nov
Cash 3-month 15-month
Source: Reuters Ecowin
LME tin stocks (tonnes)
0
5
10
15
Nov-07 Feb-08 May-08 Aug-08 Nov-08
Thousands
Source: Reuters Ecowin
LME contracts, volume traded
(Daily, 1-month moving average)
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Nov-05 Oct-06 Sep-07 Aug-08
Source: Reuters Ecowin
Market data (October unless stated)
Prices ($/t) Cash 3-
month
15-
month
LME
stocks
Tonnes LME Open Interest
(contracts), latest
Average 14,413 14,306 14,270 Sep-08 5,700 Tin 16,365
High 17,655 17,625 17,485 Oct-08 3,585
Low 11,350 11,300 11,175
Source: London Metal Exchange except Option volatility: Virtual Metals
32 | Fortis metals monthly | November 2008 Fortis/VM Group
Steel
News
• Nov 10th: Ukraine reduced its 2008 steel production forecast to 37.3 Mt from
the previous estimate of 42.8 Mt due to a sharp fall in foreign demand.
• Nov 7th: German crude steel output is set to fall around 2% this year, as
economic turmoil curbs demand.
• Nov 3rd: Vale said it had backed off from asking for a 12% price increase
from its Chinese iron ore customers for calendar year 2009 because of the
economic downturn, which it does not expect to improve before 2H 2009.
• Oct 30th: India withdrew a 15% export duty on some steel and iron products
in view of the steep fall in international prices.
• Oct 29th: Russian-based Mechel signed a $300m contract with Chinese group
Minmetals to build a rail and structural steel mill at its Chelyabinsk plant.
Analysis
• Recession bites hard
With the global recession looking likely to be severe, steel will continue to
suffer as construction and car sales slow. Prices for hot-rolled coil have fallen by
more than 40% since July, while LME Far East and Med contract prices have
decreased by 73% since their June highs. Many steel producers have responded
by severely cutting output and expansion plans, which has prompted a slight
recovery in LME prices by mid-November. ArcelorMittal, the world’s largest
steel producer, will scale back output by 35% in Q4 2008, Severstal will slash
production by 30% at its US and Italian mills, and Corus will close about 20% of
its capacity in Q4 2008.
Government economic stimulus packages will be vital for a turnaround, with the
Chinese $600bn plan the latest of note. But it will not be until mid-2009, at the
earliest, that the effects from these will be felt on the real economy. The hereand-
now looks grim, as does early 2009, and the damage done between now and
the turning point (i.e. stock builds) will take time to work its way out.
Outlook
More production cuts will be necessary, even though the major global steel
producers have announced a slew of them in the past few weeks, to steady
prices. The industry is reliant upon a fast and focused effort by
governments worldwide to ease the credit problems and stimulate the real
economy. In the short-term, demand from China, India and the Gulf
Cooperation Council states will be vital in keeping prices from declining
further. As for the world’s biggest crude steel producer, China, this crisis
will force industry consolidation but also contains a bit of good cheer, as
iron ore prices – which have risen year-on-year sharply for the past seven
years – ought to soften considerably in 2009.
Short-term LME 3-month Med and Far East contracts: $300/t-400/t.
Composite steel prices ($/tonne)
400
600
800
1,000
1,200
1,400
Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Asia N.America Europe
Source: MEPs, Reuters Ecowin
Steel products, world prices ($/tonne)
0
200
400
600
800
1,000
1,200
1,400
Aug-05 May-06 Feb-07 Nov-07 Aug-08
Cold rolled coil Hot rolled plate
Hot rolled coil
Source: MEPs, Reuters Ecowin
Note: "World" is average of Asia, N.America, and
Europe
LME steel prices ($/tonne)
0
100
200
300
400
500
600
700
01-Oct 09-Oct 17-Oct 25-Oct
Steel, 3-month, MED
Steel, 15-month, MED
Steel, 3-month, Far East
Steel, 3-month, Far East
Source: Reuters Ecowin
Market data (October unless stated)
Prices ($/t)
Asia
Composite
N.America
Composite
Europe
Composite
World
Composite
LME Open Interest
(contracts), latest
Med Far East
Aug-08 910 1,220 1,330 1,154 Steel 1,141 98
Sep-08 852 1,109 1,161 1,041
Oct-08 754 1,015 988 920
Source: MEPs, Reuters Ecowin
Fortis/VM group November 2008 | Fortis metals monthly | 33
Plastics
News
• Nov 9th: The Gulf Cooperation Council states’ plastics industry is growing at
an annual rate of 20% and the growth is likely to accelerate in the near future,
according to Duplas Al Sharq, a subsidiary of Emirates Investment and
Development (Emivest).
• Nov 3rd: The Chicago Mercantile Exchange launched two plastics futures
contracts on ClearPort. The two contracts are polypropylene and
polyethylene, and each will be listed for 24 consecutive months, beginning
with the January 2009 contract. The contracts will be 47,000lb (21.3t) in size
and will feature physical delivery in Houston.
• Oct 31st: Driven by widening product applications of polyethylene, the world
ethylene market is projected to reach 161 Mt/y by 2015, according to Global
Industry Analysts.
• Oct 20th: The $10bn first phase of the PetroRabigh complex, a joint venture
between Saudi Aramco and Sumitomo Chemical, is due to come online by
end-2008, manufacturing 1.3 Mt/y of ethylene and 900,000t/y of propylene.
Analysis
• Lower crude oil prices will help
Plastics prices continued to head down in October and early November, without
a sniff of the rally seen in other LME contracts. This may be due to very low
liquidity. By 17th November, the cash LME LLDP and PP global contracts had
lost 54% and 53%, respectively, to reach record contract lows of $755/t and
$705/t. They were $1,650/t and $1,502.5/t, respectively, on 18th September.
Industry participants now consider broader plastics prices are in freefall. Saudi
Basic Industries Corp (SABIC) expects its fourth-quarter earnings to be hit by a
rapid slide in prices and a slowdown in demand. SABIC posted its first quarterly
decline in profits in more than two years in Q3 2008, after prices of
polypropylene and polyethylene dived by 50% to below $1,000/t. The company
anticipates that the decline in production costs will not offset the drop in
revenues resulting from lower prices. Key processors in Asia, particularly China,
rely very heavily on demand from the markets of the West. With deteriorating
export demand as well as bearish domestic sentiment, petrochemical majors’
inventories are building. This has led to production cuts or suspensions. Export
sales of several Chinese processors are down by about 30%, as orders evaporate,
leading them to reduce output. However, the silver lining is retreating polymer
prices making Chinese products cheaper, and this may tempt buying.
Outlook
Packaging is a major plastics use, and an area particularly hard hit at
present. About 80% of China’s imported plastics go into exported goods,
and the US and Europe are not buying, period. The global recession is
worsening by the week, and all eyes are on the political establishments from
North America to Far East Asia to kick-start the world economy. Even
though the key plastics’ input cost – crude oil – has collapsed, so too has
demand for plastics. Short-term LME LL: $650/t, PP $700/t.
Market data (October unless stated)
Average prices Volumes (October) Open Interest
(contracts), latest
Contract Global
LLDPE
Global
PP
All
LLDPE
All
PP
All LL
contracts
All PP
contracts
First position 1,212.38 1,129.05 Daily average 4 10 3 72
Source: Reuters Ecowin
Plastics prices, nearest contract, LME
($/tonne)
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1-
Oct
8-
Oct
15-
Oct
22-
Oct
29-
Oct
5-
Nov
12-
Nov
LLDPE PP
Source: Reuters Ecowin
Plastics prices, various contracts, LME
($/tonne)
700
900
1,100
1,300
1,500
1,700
1,900
2,100
May-08 Jun-08 Aug-08 Sep-08 Oct-08
PP (First position)
PP (Second position)
LLDPE (First position)
LLDPE (Second position)
Source: Reuters Ecowin
Plastics volume traded on LME, lots
0
50
100
150
200
250
300
350
May-05 May-06 May-07
PP
LDPE
3 per. Mov. Avg. (PP)
3 per. Mov. Avg. (LDPE)
Source: VM Group
34 | Fortis metals monthly | November 2008 Fortis/VM Group
Prices
Gold ($/oz)
Silver (cents/oz)
Platinum ($/oz)
675
700
725
750
775
800
825
850
875
900
925
950
975
1,000
1,025
1,050
Nov-07 Feb-08 May-08 Aug-08
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
2,100
2,200
Nov-07 Feb-08 May-08 Aug-08
775
975
1,175
1,375
1,575
1,775
1,975
2,175
2,375
Nov-07 Feb-08 May-08 Aug-08
Source: London Bullion Market Association Source: London Bullion Market Association Source: London Platinum & Palladium Market
Palladium ($/oz)
Aluminium ($/tonne)
Copper ($/tonne)
150
175
200
225
250
275
300
325
350
375
400
425
450
475
500
525
550
575
600
Nov-07 Feb-08 May-08 Aug-08
1,500
1,700
1,900
2,100
2,300
2,500
2,700
2,900
3,100
3,300
3,500
3,700
Nov-07 Feb-08 May-08 Aug-08
Cash 3-month
15-month 27-month
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Nov-07 Feb-08 May-08 Aug-08
Cash 3-month
15-month 27-month
Source: London Platinum & Palladium Market Source: London Metal Exchange Source: London Metal Exchange
Nickel ($/tonne)
Lead & zinc ($/tonne)
Tin ($/tonne)
2,000
7,000
12,000
17,000
22,000
27,000
32,000
37,000
Nov-07 Feb-08 May-08 Aug-08
Cash 3-month
15-month 27-month
800
1,200
1,600
2,000
2,400
2,800
3,200
3,600
4,000
Nov-07 Feb-08 May-08 Aug-08
Zinc cash Zinc 27-Month
Lead Cash Lead 15-Month
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000
Nov-07 Feb-08 May-08 Aug-08
Cash 3-month 15-month
Source: London Metal Exchange Source: London Metal Exchange Source: London Metal Exchange
Fortis/VM group November 2008 | Fortis metals monthly | 35
Quantitative research
PCA background
PCA stands for Principal Component Analysis. It is a standard technique used
for the study of forward curve dynamics. At any point in time, a future curve can
be represented by three values known as the level, the slope and the curvature.
Each of these values has a physical meaning. A variation of the level represents
a parallel shift of the curve, while a variation of the slope represents a rotation.
An increasing slope indicates a clock-wise rotation and therefore reveals a
backwardation of the curve. By contrast, a decreasing slope indicates a curve
that shows a contango. We can therefore expect the slope to respond to market
events associated with supply, demand, and stocks. Furthermore, the curvature
gives an insight into prices during the particular month. A rising curvature
indicates that during the first and the last third of the contract month the price
increases, while the second third decreases. This provokes a distortion, or a
sharper bend of the curve.
Provided charts
For each metal there are five graphs. The first, at the top of the page, displays
the forward curve for a number of dates. These are selected in order to
demonstrate specific evolutions of the curve during the last month, and also to
illustrate some particular features of the curve. The vertical axis displays the
price of each contract (in USD) as provided by Bloomberg. The horizontal axis
gives the future’s settlement date. The used contracts are known as generic and
are constructed by using successive contracts which always expire “in N
months”, as appropriate.
Demonstration of PCA graph
-132
-122
-112
-102
-92
-82
-72
-62
15/2/07 15/3/07 15/4/07 15/5/07
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
One year average (only for the
error term)
Principal component: this can
be the level, the slope, the
curvature or the error term.
The corresponding axis is on
the left.
Historical probability (calculated over a one
year history) that the value observed on
that day would have been greater. The
probability value is to be read on the right
axis. For the error term and to a lower
extend for the curvature, this value can be
read as a peak detector as the error term
and the curvature tend to exhibit mean
reversal properties.
Source: Fortis Modelling
Quantitative Modelling team
Peter Cauwels
Tel: +32 265 47 90
Email: peter.cauwels@fortis.com
36 | Fortis metals monthly | November 2008 Fortis/VM Group
Aluminium
Future curve analysis
Future contract
Fundamental outlook
We estimate some 17Mt/y of global aluminium
production capacity is currently operating at a loss,
most of this in China. Further price falls – which are
quite feasible given the severity and the swiftness of
the downturn – will put even more production
capacity at risk, until sufficient output is shed to
match demand.
Short-term LME 3-month price: $1,800/t-$1,950/t.
1,800
2,000
2,200
2,400
2,600
2,800
3,000
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Future contract
Price (USD)
12/11/08 12/10/08 12/09/08 12/08/08
Source: Fortis Modelling, Bloomberg
Principal component analysis (arbitrary units)
Level (t) – 99.5% of curve variance
Slope (t) – 0.5% of curve variance
-4,000
-3,000
-2,000
-1,000
0
1,000
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-200
-150
-100
-50
0
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Curvature (t) – 0.00% of curve variance
Error (t) – 0.00% of curve variance
-10
-5
0
5
10
15
20
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-20
-15
-10
-5
0
5
10
15
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Fortis/VM group November 2008 | Fortis metals monthly | 37
Copper
Future curve analysis
Future contract
Fundamental outlook
Support has been removed and hence the
spectacular crash in the copper price to below
$4,000/t. With such large stock inflows to exchange
warehouses, poor demand support and, as yet,
insufficient supply cuts, the price trend is down.
Short-term LME 3-month price: $3,300/t-$3,700/t.
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Future contract
Price (USD)
12/11/08 12/10/08 12/09/08 12/08/08
Source: Fortis Modelling, Bloomberg
Principal component analysis (arbitrary units)
Level (t) – 99.8% of curve variance
Slope (t) – 0.16% of curve variance
-20,000
-15,000
-10,000
-5,000
0
5,000
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-400
-200
0
200
400
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Curvature (t) – 0.01% of curve variance
Error (t) – 0.00% of curve variance
0
20
40
60
80
100
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-40
-20
0
20
40
60
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
38 | Fortis metals monthly | November 2008 Fortis/VM Group
Nickel
Future curve analysis
Future contract
Fundamental outlook
The nickel price is now at 2004 levels, after losing
80% of its value since March 2008. LME stocks are
at a nine-year high and mounting, and the bottom
has fallen out of the stainless steel market. A huge
supply response is called for, but we still expect a
30,000t surplus this year and a large 110,000t
surplus in 2009.
Short-term LME 3-month price: $9,500/t-$11,000/t.
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Future contract
Price (USD)
12/11/08 12/10/08 12/09/08 12/08/08
Source: Fortis Modelling, Bloomberg
Principal component analysis (arbitrary units)
Level (t) – 99.8% of curve variance
Slope (t) – 0.16% of curve variance
-70,000
-60,000
-50,000
-40,000
-30,000
-20,000
-10,000
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-1,500
-1,000
-500
0
500
1,000
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Curvature (t) – 0.00% of curve variance
Error (t) – 0.00% of curve variance
-300
-200
-100
0
100
200
300
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-200
-100
0
100
200
300
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Fortis/VM group November 2008 | Fortis metals monthly | 39
Lead
Future curve analysis
Future contract
Fundamental outlook
Lead has acted as a good barometer of the fear
factor in the past two months because, despite
falling stocks and small or close to balanced
supply/demand fundamentals, its price has
nevertheless only fallen by 19%, to trade within
$1,300/t-$1,500/t in November.
Short-term LME 3-month price: lead $1,300/t-
$1,400/t.
1,000
1,200
1,400
1,600
1,800
2,000
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
Future contract
Price (USD)
12/11/08 12/10/08 12/09/08 12/08/08
Source: Fortis Modelling, Bloomberg
Principal component analysis (arbitrary units)
Level (t) – 99.9% of curve variance
Slope (t) – 0.07% of curve variance
-5,000
-4,000
-3,000
-2,000
-1,000
0
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-20
0
20
40
60
80
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Curvature (t) – 0.00% of curve variance
Error (t) – 0.00% of curve variance
-15
-10
-5
0
5
10
15
20
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-5
0
5
10
15
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
40 | Fortis metals monthly | November 2008 Fortis/VM Group
Zinc
Forward curve analysis
Future contract
Fundamental outlook
Zinc could be heading for sub $1,000/t levels, last
seen in 2004. Fundamentally, the world is awash
with zinc as demand falters and supply is responds
slowly. We are still positive on zinc in the long-term,
as many large mines reach the end of their
operational lives and little is scheduled to replace
them.
Short-term LME 3-month price: $1,000/t-$1,200/t.
500
1,000
1,500
2,000
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Future contract
Price (USD)
12/11/08 12/10/08 12/09/08 12/08/08
Source: Fortis Modelling, Bloomberg
Principal component analysis (arbitrary units)
Level (t) – 99.9% of curve variance
Slope (t) – 0.12% of curve variance
-5,000
-4,500
-4,000
-3,500
-3,000
-2,500
-2,000
-1,500
-1,000
-500
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-100
-50
0
50
100
150
200
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Curvature (t) – 0.00% of curve variance
Error (t) – 0.00% of curve variance
-25
-20
-15
-10
-5
0
5
10
15
20
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-15
-10
-5
0
5
10
15
20
25
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Fortis/VM group November 2008 | Fortis metals monthly | 41
Tin
Future curve analysis
Future contract
Fundamental outlook
Tin remains one of the most positive of base metals,
as its supply-side is tight. The market is expected to
be in deficit this year and stocks are at extremely
low levels. Sentiment for tin plate is positive, as
sales of cheaper canned food have benefited from
the economic turmoil.
Short-term LME 3-month: $13,500/t.
12,000
14,000
16,000
18,000
20,000
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
Future contract
Price (USD)
12/11/08 12/10/08 12/09/08 12/08/08
Source: Fortis Modelling, Bloomberg
Principal component analysis (arbitrary units)
Level (t) – 99.96% of curve variance
Slope (t) – 0.04% of curve variance
-30,000
-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-200
-100
0
100
200
300
400
500
600
700
800
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
Curvature (t) – 0.00% of curve variance
Error (t) – 0.00% of curve variance
-50
0
50
100
150
200
250
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-50
-30
-10
10
30
50
70
12/8/08 12/9/08 12/10/08 12/11/08
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Source: Fortis Modelling Source: Fortis Modelling
42 | Fortis metals monthly | November 2008 Fortis/VM Group
Notes
Fortis/VM group November 2008 | Fortis metals monthly | 43
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44 | Fortis metals monthly | November 2008 Fortis/VM Group
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Fortis
Fortis is an international financial services provider engaged in
banking and insurance. We offer our personal, business and
institutional customers a comprehensive package of products
and services through our own channels, in collaboration with
intermediaries and through other distribution partners.
Building on our leading position in the Benelux countries, we
offer an integrated network to internationally operating
companies throughout Europe and provide wealthy private
clients and business people with advanced services based on
a unique set of competencies. Our expertise in niche markets
such as shipping, commodity, export and project finance, and
fund administration has made us a regional or world leader in
those areas. We also successfully combine our banking and
insurance expertise in growth markets in Europe and Asia and
lead the bancassurance markets in Spain and Portugal.
With a market capitalisation of EUR 32.3 billion (29/02/2008),
Fortis ranks among the fifteen largest financial institutions in
Europe. Our sound solvency position, our presence in 50
countries and our dedicated, professional workforce of 60,000
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Fortis
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