Nickel and aluminium ETPs saw inflows as trade-war punishment on industrial metals reprieve

ETF Securities Nickel and aluminium ETPs saw inflows as trade-war punishment on industrial metals reprieveNickel and aluminium ETPs saw inflows as trade-war punishment on industrial metals reprieve

ETF Securities Weekly Flows Analysis – Nickel and aluminium ETPs saw inflows as trade-war punishment on industrial metals reprieve

Highlight

  • Long nickel and aluminium ETPs saw the highest inflows since February 2018 as prices begin to recover.
  • Gold ETPs receive first inflows in six weeks
  • Turkish woes pressure the Euro

Long nickel and aluminium ETPs saw the highest inflows since February 2018 as prices begin to recover. Nickel prices rallied 2.5% while aluminium rallied 4.2% last week as the market appears to be shifting focus to the supply disruptions that US protectionism is likely to cause. Long nickel ETPs received US$31.2mn while long aluminium ETPs received US$6.5mn. As we pointed out in Trade wars: price optimism ahead for metals?, the market appears to be wavering between protectionism being positive and protectionism being negative for prices. In the first bout of tariff announcements in February 2018, prices trended down. Then between April and June prices rallied as the supply disruptions came into focus. As the Trump administration rattled its protectionist sabres more intensely, the market had been concerned about the damage to global growth, with prices declining for most of June and July. The reopening of several mines in the Philippines in June (following their closure in February 2017 for environmental violations) added further headwinds to the metals’ performance. But as of last week the market shifted focus back to supply disruptions despite the intensity of Trump’s threats of trade wars revving up a gear. Copper only managed to gain 0.1% as the strike at Escondida (the world’s largest copper mine) was averted at the last minute as the Chilean government began to act as a mediator between the Union and BHP Billiton. However, if an agreement on the wage contract is not agreed by the 14th August 2018, a strike could be back on the cards.

Long gold ETPs received the first inflow in six weeks, amounting to US$26mn. Although gold prices remained lacklustre, some investors are now coming to believe that the price decline has been overdone. We certainly hold that view. Although the US Dollar is strengthening, US Treasury yields have not risen as much as we had expected back in June and US inflation is running at a 6-year high. Overly-subdued investor sentiment for the metal (both in futures and ETP markets) accounts for the poor price performance. If that is now turning a corner, we could see gold prices play catch-up. Our estimated base case is for gold to reach US$1307 by June 2019, up 8% from today’s levels (see Gold outlook). Economic disarray in Turkey, with a sharp Lira depreciation (which had knock-on contagion to the Euro last week), could send investors looking for haven assets. Gold has traditionally played the role of a safe haven asset in many investors portfolios.

Second week of short USD, long EUR ETP inflows likely to lead to disappointment. Last week there were US$5.9mn inflows into Short USD, long EUR ETPs. The prior week there were US$5.6mn of inflows. In the past week the Euro depreciated close to 2% against the US Dollar as investors feared contagion into the European banking system from exposure to Turkish loans.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0)207 448 4330
E research@etfsecurities.com

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Macro outlook supports the mining sector but further upside remains muted

Macro outlook supports the mining sector but further upside remains muted

ETF Securities Equity Research: Macro outlook supports the mining sector but further upside remains muted

Highlights

  • Demand for metals remains well supported by a favourable macro-economic backdrop but China’s reform policy is expected to soften future metal demand.
  • The benefits of the weaker US dollar on higher commodity prices are outweighed by higher local currency input costs for producers in the mining sector.
  • Capex growth has turned positive for the first time in five years and the electric car revolution opens further avenues of investment for the mining sector.
  • Strict capital discipline among the miners has improved operational efficiency but miner’s valuations are not cheap.

Macro outlook supports demand

The global economy looks set to embark on a strong growth trajectory evident from the improvement in global purchasing manufacturing indices (PMI) since the second half of 2016. The optimism over global expansion increasing consumption of metals has led to a revival in the price of most metals this year. As a consequence, we have witnessed the top 100 diversified miner’s aggregate price appreciate 86% since 31 January 2016 (Source: Bloomberg).

Added to that, the current weakness of the US dollar is acting as an important catalyst in fuelling the commodity price rebound. As the world’s largest economy enters the late stage of the economic expansion cycle we expect to see tightening of the labour market combined with rising inflation, commodity prices and interest rates as the Federal Reserve normalises policy. The raw industrials index and the trade weighted US dollar tend to move inversely to each other with a negative 0.80 correlation. This counter cyclical relationship bodes well for base metal prices as investors look towards metals as a store of value versus the greenback. While the mining sector will benefit from higher commodity prices, the weaker US dollar could temper the benefits for producers that have a high proportion of costs in local currency.

China’s reforms take centre stage

A government led initiative in China’s construction industry since early 2016 underpinned the rebound of industrial metal prices. The emphasis on reforms as highlighted by President Xi at 19th National Party Congress in October 2017 suggests Chinese economic growth will gravitate more towards services and consumer spending. These activities are significantly less resource intensive and could soften demand for industrial metals. Added to that, the ongoing cooling of fiscal stimulus to the manufacturing and construction industries that kick started in H217, will further dampen new demand for industrial metals.

That being said, China’s supply side reform, to tackle environmental pollution, address unlicensed production and excess supply, resulted in significant escalation in metal prices last year. The widespread efforts improved capacity utilization rates within the aluminium, coal and steel industries. To a large extent, the impact of the capacity reductions in steel and coal appear to have already passed their peak, as the Chinese governments met their targets late last year.

Miners are back in business

After five consecutive years of negative growth in capex, total spending has finally turned positive, rising 8% since the prior year. A large part of the spending has been dedicated to sustaining production rather than expansionary projects. Miners are tapping into the new sources of growth led by technology driven innovation. At the forefront of this revolution, electric car production is expected to bolster demand for lithium, cobalt, copper and aluminium. Mining companies owning lithium and cobalt deposits are well positioned to benefit from rising demand owing to their use in battery cathodes.

Ongoing supply deficits projected

A vast variety of metals are projected to continue to extend their supply deficits into 2018 as demand outstrips supply. Declining inventory levels of global metals stocks namely – zinc, copper, aluminium, platinum, palladium and tin remain supportive of their price recovery. However deteriorating ore grades and falling reserves, make it vital for miners to undertake further exploration projects to maintain their current production.

Miners are not cheap

Owing to the challenging pricing environment between 2011 and 2016 the mining sector imposed a stricter capital discipline in an effort to shore up their balance sheet. Since mid-2016, valuations for the sector have climbed in lock step with rising profitability. Mining stocks currently trade at 17x earnings compared to the long term average of 10x, supported by higher earnings growth (Source: Bloomberg, as of 30 January 2018). Meanwhile, the current price to book ratio at 2x trades in line with its long term average of 1.7x as impairments charges reduced significantly. Recovering commodity prices, an emphasis on debt repayments and improving liquidity have helped alleviate pressure from ratings agencies as ratings outlooks for base and precious metal miners turn positive.

For more information contact:

Catarina Donat Marques
ETF Securities (UK) Limited
T +44 20 7448 4386
E catarina.donatmarques@etfsecurities.com

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This communication may contain independent market commentary prepared by ETFS UK

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A short-term pull-back in industrial metals likely to open new entry points

A short-term pull-back in industrial metals likely to open new entry points

ETF Securities Commodity Research: A short-term pull-back in industrial metals likely to open new entry points

Highlights

  • Industrial metal prices have staged a strong rally as tightening supplies support fundamentals.
  • Given the long lead times in exploration and development of mines, even though capital expenditure may soon start to increase, we expect supplies to remain tight and the market is unlikely to achieve balance in the short term.
  • However, there are threats to the current rally as strong momentum could give way to a pull-back in prices. Historically periods in which trading volumes in China have risen sharply have been followed by a correction.
  • These pull-backs are usually an opportunity to shake out momentum trades and allow the market to focus on fundamentals rather than a sustained downturn.

Recovering losses

Industrial metals are staging a strong rally. Year to date, the Bloomberg Industrial Metals sub-index for example has risen 17%. Industrial metal prices last peaked in 2011 and since lost 60% by the time it hit a trough in 20161. About 34% of those losses have recovered so far in the rally that started in 2016. While zinc is currently trading higher than it was in 2011, all other metals still have not recovered to their prior levels.

Metals in a supply deficit

The demand for zinc, copper and nickel is expected to be higher than supply. These metals have gone through back-to-back years of supply deficits. Copper has been in a supply deficit for the past seven years and by 2018, the metal will have recorded nine consecutive years of stock withdrawals if the International Copper Study Group’s forecasts are correct. The lead market is broadly balanced. Aluminium could shift into a supply deficit if China follows through with its attempts to cut capacity in winter months to improve the environment (see Metal supply to tighten as environmental concerns enforced).

Increase in production unlikely soon

Since industrial metal prices began to fall in 2011, capital expenditure by miners collapsed. In mid-2017 capital expenditure by the largest 100 mines was 60% lower than in mid-2013. Given the long lag times behind investment and completion of mines, we don’t expect the tightness of mine supply to reverse any time soon.

Added to that, miners are cautious to increase spending as they wait for the price recovery to prove sustainable. Historically we have seen about a year-long lag between a recovery in price and a recovery in capital spending. Given that the rally stalled between February and June this year (before starting again), miners could exercise even more caution in this cycle.

Historically we have found that metal markets begin to move towards a balance two years after miner profit margins hit rock-bottom. Miner margins fell to a low of 2% at the beginning of 2016 and since have recovered to just over 7%. So if we see a repeat of historical patterns, we should see supply begin to improve in late 2018, but it could take years to move back into balance.

Rally sustainabilty

We believe that the tightness in the metals market provides fundamental strength to prices. However, we have observed periodic pull-backs in prices: November – December 2016 and March – June 2017, when metal prices declined close to 10% in each episode. Given the rapid 17% increase in prices since June, are we due another correction?

In November 2016 we saw the price pull-back occur shortly after volumes of trading in Chinese futures increased and subsequently fell. The price volatility was largely driven trading volatility. At the time the Chinese authorities had increased their regulatory grip on the market to stop destabilizing trades from ‘tourist’ investors from influencing the market. Given the rise in trading volumes on the Shanghai Futures Exchange in August, we could be witnessing another episode of herd-like buying that could dissipate very quickly.

We note that, while in the November 2016, pre-7am trading in LME copper surged (indicating increased buying from Asia), this time around, volumes have remained stable. However, pre- 7am LME aluminium volumes have increased alongside SHFE volumes in August.

Indeed, we could be witnessing a broader trend of Asian trading having a wider influence on LME prices. With the exception of copper once again, the share of pre-7am trading in most LME metals has been rising over the past two years.

A pull-back in prices is a likely outcome as momentum trades withdraw. However, as the fundamentals remain strong, we believe that a good entry point will open up as result.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

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ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

 

 

ETP investors bargain-hunt as commodities capitulate

ETP investors bargain-hunt as commodities capitulate

ETF Securities Weekly Flows Analysis – ETP investors bargain-hunt as commodities capitulate

  • Oil ETPs continue to see inflows with prices erasing all post-OPEC deal gains.
  • Sharp price declines drive bargain hunting in silver, copper and aluminium ETPs.
  • Emerging market bond ETPs see largest outflows since November 2016.

Crude oil ETPs saw the third consecutive week of inflows as prices drop 6.3%. As US inventories fail to decline in line with seasonal trends and US production continues to expand, oil prices have given back almost all of their gains since OPEC reached a deal to cut production in November 2016. Despite Saudi Arabia’s strong push to extend the deal for another six months at least, the market remains unconvinced with OPEC’s strategy. Net speculative long positions in Nymex oil futures are down by close to a third since a peak in February 2017. However, ETP investors sensed another buying opportunity with US$39.5mn long oil ETPs inflows.

Strong inflows into copper and aluminium ETPs despite sharp price declines. Metal prices fell as the market began to price in a June Fed rate as a near certainty and doubts about China’s growth story resurfaced. Copper fell 2.6%, while aluminium declined a modest 0.5%. Although investors in broad industrial metal baskets cut their investments by US$16.9mn (the highest outflows since December 2016), more discriminating ETP investors – focused on individual metal fundamentals – saw the recent price dip as a good buying opportunity. Inflows of US$23.0mn in to long copper ETPs marked the highest creations since March 2017, while inflows of US$9.4mn into long aluminium ETPs were the highest since July 2016. Copper is likely to remain in a supply deficit in 2017 and 2018 which will mark nine straight years of supply falling short of demand. Aluminium supply meanwhile should tighten significantly if China follows through with capacity constraint in winter months amid environmental concerns from smelting activity.

Inflows into silver ETPs rise to highest since December 2016. US$12.5mn into long silver ETPs contrasts the US$11.2mn outflows from gold ETPs last week. Both metal prices fell hard after the Fed meeting which investors interpreted as a confirmation of a rate hike in June. However, silver appears cheap relative to gold, with the gold-to-silver ratio rising to 75 from 68 last month which has presented a buying opportunity. Moreover, after gold almost hit our fair value estimate of US$1300/oz a few weeks ago, we expect it to decline to US$1230 by year-end. However, we estimate silver’s fair value to be close to US$20/oz by year end, offering more than a 20% upside to investors from current levels. Supply deficits, growing industrial demand and a tightening in exchange inventory provide upside potential.

US$7.1mn outflow from emerging market bonds. Investors took profit on their emerging market bond ETP holdings, amid the pressure of declining commodity prices and rising US yields (potentially narrowing yield differentials). Outflows were at their highest since November 2016 after YTD gains of 6.6% in EM bonds.

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Austria: Investors should base their investment decision only on the relevant prospectus of the Company, the Key Investor Information Document, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association, which can be obtained free of charge upon request at the Paying and Information Agent in Austria, Erste Bank der oesterreichischen Sparkassen AG, Graben 21, A1010 Wien, Österreich and on www.etfsecurities.com. France: Any subscription for shares of the Funds will be made on the basis of the terms of the prospectus, the simplified prospectus and any supplements or addenda thereto. The Company is a UCITS governed by Irish legislation and approved by the Financial Regulator as UCITS compliant with European regulations although may not have to comply with the same rules as those applicable to a similar product approved in France. Certain of the Funds have been registered for marketing in France by the Authority Financial Markets (Autorité des Marchés Financiers) and may be distributed to investors in France. Copies of all documents (i.e. the prospectus (including any supplements or addenda thereto, the Key Investor Information Document, the latest annual reports and the memorandum of incorporation and articles of association) are available in France, free of charge, at the French Centralizing Agent, Société Générale, Securities Services, at 1-5 rue du Débarcadère, 92700 Colombes – France. Germany: The offering of the Shares of the Fund has been notified to the German Financial Services Supervisory Authority (BaFin) in accordance with section 310 of the German Investment Code (KAGB). Copies of all documents (i.e. the Key Investor Information Document (in the German language), the prospectus, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association) can be obtained free of charge upon request at the Paying and Information Agent in Germany, HSBC Trinkaus & Burkhardt AG, Königsallee 21-23, 40212 Düsseldorf and on www.etfsecurities.com. The current offering and redemption prices as well as the net asset value and possible notifications of the investors can also be requested free of charge at the same address. In Germany the Shares will be settled as co-owner shares in a Global Bearer certificate issued by Clearstream Banking AG. This type of settlement only occurs in Germany because there is no direct link between the English and German clearing and settlement systems CREST and Clearstream. For this reason the ISIN used for trading of the Shares in Germany differs from the ISIN used in other countries. Netherlands: Each Fund has been registered with the Netherlands Authority for the Financial Markets following the UCITS passport-procedure pursuant to section 2:72 of the Dutch Financial Supervision Act. United Kingdom: Each Fund is a recognised scheme under section 264 of the Financial Services and Markets Act 2000 and so the prospectus may be distributed to investors in the United Kingdom. Copies of all documents (i.e. the Key Investor Information Document, the prospectus, any supplements or addenda thereto, the latest annual reports and semi-annual reports and the memorandum of incorporation and the articles of association) are available in the United Kingdom from www.etfsecurities.com. None of the index providers of the Funds referred to herein nor their licensors make any warranty or representation whatsoever either as to the results obtained from use of the relevant indices and/or the figures at which such indices stand at any particular day or otherwise. None of the index providers shall be liable to any person for any errors or significant delays in the relevant indices nor shall be under any obligation to advise any person of any error or significant delay therein.

Aluminium: recent recovery may be short-lived

Aluminium: recent recovery may be short-lived

Aluminium: recent recovery may be short-lived Years of chronic over-supply led by China’s lack of discipline in cutting back production capacity has seen global aluminium prices halve in since they hit a peak in 2008. Aluminium prices have started to increase in 2016 , but we believe that the recovery will be short-lived. Aluminium prices have risen 6.7% in the past 6 months (although that may appear lackluster compared to the 37.4% return for zinc and 27.0% return for nickel). Encouragingly we are seeing inventory held in the major metal exchanges (London Metal Exchange and Shanghai Futures Exchange) decline, indicating that commercial usage is drawing on the stock overhang.
Click to enlarge  Source: Bloomberg, ETF Securities Speculative positioning in the futures market (an indication of market sentiment toward the metal) has recovered to levels not seen in over a year. The improvement in sentiment has been driven mainly by an increase in long positions rather than a decline in short positions.
Click to enlarge Source: Bloomberg, ETF Securities However, a price recovery could discourage smelters from rationalising business operations, leaving the oversupply issue unaddressed. Although China’s old smelters are often loss-making and raking up non-performing loans with their state lenders, China’s new smelters are widely viewed as the most modern and lowest-cost operating in the world. According to World Aluminium data, China’s production of aluminium increased between April and June 2016 after being on a declining trend between August 2015 and February 2016. The depreciation in the Renminbi is likely to see more of that overproduction exported and to weigh on global prices.

Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).