Etikett: Industrial metals

Commodity recovery to continue although geopolitics acts as source of volatility

Commodity recovery to continue although geopolitics acts as source of volatility ETF SecuritiesCommodity recovery to continue although geopolitics acts as source of volatility

Commodities Research – Commodity recovery to continue although geopolitics acts as source of volatility

Highlights

  • Industrial metals likely to lead commodity performance in 2018 on the back of tight supply and demand continuing to rise.
  • Monetary conditions likely to weigh on gold although geopolitical risks are holding prices up for now.
  • Planned production curbs and geopolitics currently keeping oil prices high; US production likely to expand.

Commodities are in a third year of a recovery, after a five year slump. Being largely a cyclical asset class, commodities have traced the economic recovery that has gathered momentum in recent years. Global manufacturing purchasing managers indices hit a seven year high earlier this year, indicating that manufacturing order books are strong and inventories are lean, boding well for commodity-intensive demand from the industrial sector. In recent weeks the threat of a trade war has dented otherwise strong performance and we believe that as long as the threat subsides, fundamentals will supersede and allow commodities to continue to recover. For certain commodities like aluminium and oil, the threat of supply disruptions from sanctions could lead to higher prices as long as demand is not hampered by the economic uncertainty that trade wars and sanctions breed.

Asset Class Performance Ranked – 2007-2018

Source: ETF Securities, Bloomberg

Data until April 30, 2018; All returns are in USD; YTD returns are from 29 Dec 17 to 30 Apr 18; 10 Yrs returns are annualised from 29 Dec 07 to 29 Dec 17.

Data: Equity – MSCI World, Bond – Bloomberg Barclays Agg Sovereign TR Unhedged, Real Estate – EPRA/NAREIT Global, Commodity – Bloomberg All Commodities, Cash – US T-Bill 3 Mth

Historical performance is not an indication of future performance and any investments may go down in value

As highlighted below, commodities are not a homogenous, unified asset class and the performance of each subsector can be vastly different. We expect differentiated performance during 2018. Industrial metals are likely to continue to take a lead (leveraging off their cyclical nature). Meanwhile a rising interest rate environment is likely to place downward pressure on gold prices, although the metal is likely to benefit from its potential role as a haven asset. With oil prices likely to have topped out, energy prices are likely to be a drag on the wider commodity complex, if the geopolitical premium currently present dissipates. Agriculture is somewhat difficult to assess until the crop is in the ground, but based on what’s in progress, damage to the US winter wheat and West African cocoa crop could be countered by a strong rebound in sugar and coffee production, leaving that segment broadly flat.

Commodity Sector Performance Ranked – 2007-2018

Source: ETF Securities, Bloomberg Data until April 30, 2018; All returns are in USD; YTD returns are from 29 Dec 17 to 30 Apr 18; Data: Proxies for each commodity sector using Bloomberg sub-sector indices TR

Historical performance is not an indication of future performance and any investments may go down in value

Industrial metals

Most industrial metals are in a supply deficit (i.e. demand is greater than supply). Demand remains strong in an environment of economic growth, while supply has been constrained after a dearth of capital spending by miners. It is unlikely that supply will surge in the near term give the lags between project sanction and completion. Recovering miner margins are likely to see several metals come to a production balance in a couple of years, but for now the market remains tight.

Copper supply was constrained last year as the world’s top two producers Escondida in Chile and Grasberg in Indonesia underwent supply disruptions. The root causes of these disruptions have not been fully resolved. Workers at Escondida went on strike for 44 days as they were unhappy with wage negotiations. Instead of agreeing on a wage that would be palatable, Escondida used an obscure law to extend the current contract to this year. That contract expires in July 2018. Early wage negotiations have started, but there is no guarantee that an amicable outcome will be reached without further outages.

Production at Grasberg paused due to an impasse between the majority owner of the mine, Freeport McMoran Inc and the Indonesian Government who insisted that they divest 51% of their holdings of the local mine. While an agreement has been reached, the deal still needs to be financed, and it is not clear at what price. Either way, Freeport is unlikely to invest significant amounts in this mine, given its recent experience with ownership rights. With the open pit part of the mine likely to be exhausted in coming years, underground deposits will need to be developed. That will be difficult if investment is inadequate.

Alongside the strength in cyclical demand for nickel, structural changes in demand bode well for the metal. Nickel is used in battery technology, which is experiencing a boost in demand from the electric vehicle industry. In 2016, the stock of electric vehicles was around 2 million (0.2% of total stock). The International Energy Agency forecast that by 2020 there will be between 9 and 20 million electric vehicles and by 2025 there will be 40-70 million vehicles. The nickel-manganese-cobalt (NMC) cathode is the most popular cathode used in lithium-ion batteries.

The European Commission’s Joint Research Centre forecasts that NMC cathodes will grow more than other forms. By 2025, they expect NMC demand to rise from 40k tonnes in 2015 to 192k tonnes (a rise from 29% share to 48% share of the overall cathode active materials market for batteries).

Up until recently, the NMC cathode would use equal parts of nickel, manganese and cobalt, but the market is changing to a 8:1:1 ratio of the three metals (in favour of nickel). The reason for the transition is largely due to the relative scarcity of cobalt and potential supply disruptions to the metal. 60% of the world’s cobalt is mined out of the Democratic Republic of Congo (DRC), a country which lacks political and economic stability.

Although the threat of trade wars and sanctions have put into question the strength of potential demand for industrial metals and thus dented the performance of certain metals in recent weeks, the disruption to trade could equally tighten the supply of metal. That is already being played out in aluminium.

Precious metals

Gold has been a key beneficiary of the recent rise in geopolitical risk. Gold wears many hats. At times it is a monetary asset – an alternative currency to the US Dollar or Euro – whose value historically declines in periods of monetary tightening. Other times it can be seen as a safe-haven asset – the port of call for investors seeking refuge from the volatility that uncertainty breeds. Today gold is wearing that second hat. In fact for most of this year gold has been sporting its safe-haven hat. US government shutdowns, sabre-rattling between US/Japan and North Korea, the ratcheting up of a trade war between the world’s largest economies, interactions between Russia and NATO sponsors deteriorating back to cold-war tendencies, the potential return of sanctions against Iran and the proxy war between Saudi Arabia and Iran are few of the sources of investor anxiety. That’s all in the backdrop of cyclical assets experiencing periodic downward lurches after several years of serenity. In recent days the threat of military strikes in Syria have added to that anxiety.

In the absence of this second hat, we believe that gold would be trading much lower than the US$1309/oz level it was trading as of 01/05/2018 (Bloomberg). Interest rates in the US are rising, which will place downward pressure on gold prices, especially if the US is increasing rates faster than its counterparts in other countries (which could reverse the recent US Dollar weakness). In the absence of geopolitical risk, we believe that gold could decline to US$1275-US$1285/oz at the end of this year.

Energy

Oil prices have rebounded significantly from their 2016 lows of US$28/bbl. At close to US$74/bbl (01/05/2018, Bloomberg), oil prices are still far from their 2014 highs of US$115/bbl, and we believe are unlikely to reach that point in coming years. Indeed, oil is currently trading at the upper end of what we think is a viable trading range (in the absence of new supply shocks). For as much as the Organization of the Petroleum Exporting Countries (OPEC) has made progress in curbing production and reducing OECD inventories of oil, the high price environment will encourage further expansion of production from the United States. The US shale oil industry is price-sensitive and nimble. In contrast to traditional oil production which has multi-year lead times, the decision to switch on a rig in the US can lead to oil production within a matter of weeks. We expect US supply to continue to rise, which will keep a lid on prices. Meanwhile, we expect that OPEC will start to signal how it will taper its curbs on production down in 2019 at its June 2018 meeting. So there is likely to be downward pressure on prices.

However, for the time being there is a geopolitical premium on oil prices. Potential sanctions against Iran and Russia could tighten the market up more aggressively than is currently assumed. Obviously geopolitical risk can blow over as quickly as they flare up, which could remove the premium in oil. However, should the risks crystallise in actual sanctions, prices could trend higher.

Curve dynamics

When investing in commodities via futures contracts (or solutions tracking a futures contract), an investors is exposed to the price difference between an expiring contract and the new contract they roll into. Sometimes that works in the investors favour (i.e. when the new contract is cheaper than the expiring contract – referred to as backwardation) and sometimes that works against the investors (i.e. when the new contract is more expensive than the expiring contract – referred to as contango). For several years (between 2014 and 2017), the Brent futures curve was primarily in contango, which acted as a drag on performance for investors in Brent futures. A global excess supply of oil kept front month prices of oil lower than elsewhere on the futures curve. OPEC’s efforts to drain excess inventories of oil since 2017 have helped Brent oil futures move back into backwardation. Although we expect OPEC to slowly taper some of its curbs on production in 2019, we are unlikely to see a glut of inventory develop again. Therefore, unless demand suddenly declines (which we don’t expect), we are unlikely to see the Brent futures go back into contango this year and hence this source of drag on performance is likely to be mitigated.

Brent oil: front minus second month contract price

For more information contact:

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

Important Information

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.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

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.

ETF investors see silver lining in equity storm

ETF investors see silver lining in equity storm

ETF Securities – ETF investors see silver lining in equity storm

Highlights

  • A rout in cyclical markets set off a pronounced sell-off in commodities, including industrial metals, oil and gold.
  • ETF investors however, saw an opportunity to buy equities following price declines.
  • Record US oil production continues to weigh on oil.

Download the complete report (.pdf)

Industrial metals ETPs saw US$99.9mn outflows. Arguably the most cyclically exposed of the commodities – industrial metals – experienced the highest outflows in 10 weeks. An equity market sell-off dragged other cyclical assets lower. Most of the outflows were concentrated in broad baskets (-US$133.6mn) and copper (- US$26.3mn). However, there were inflows into nickel (US$61.3mn) and silver (US19.3mn), highlighting that some investors are tactically searching for opportunities after the price decline.

Inflows into European equity long ETFs rose to highest level since 2016, while outflows from short ETFs rose to highest since 2016. Investors bought US$15.9mn of European equity ETPs as European bourses saw a capitulation in prices. Meanwhile investors locked in their profits, selling US$9.9mn of European (mainly UK) short ETF positions. The trading patterns indicate that many ETP investors see the current equity market declines as transitory

Gold fails to attract haven asset seekers. Gold is often the first port of call in times of stress. Not last week apparently. Gold saw US$57.3mn of outflows as its price declined 1.3%. As US Treasury yields spiked to 2.86% at the end of the week from 2.71% at the beginning of the week and US dollar appreciated, gold prices fell. A second US government shutdown in the space of three weeks on Friday only offered temporary support to gold as a spending bill was signed and government re-opened in a matter of hours.

Oil ETPs saw a further US$29.7mn of outflows as US pumps out a record 10.25mn barrels per day. In the past 32 weeks there has only been one week of inflows into oil ETPs. In contrast to oil futures, which had recently seen speculative positioning rise to an all-time high, ETP investors had been selling into the price rally that started in June 2017 and ended in January 2018. With many ETP investors having accumulated positions during the prices declines from 2014, recent selling indicates profit taking. We had argued in that prices around US$70/bbl hit in January were not sustainable as US production would rise in response and suppress prices again. Oil rig counts in the US have risen for the past three weeks, oil production has risen for four consecutive weeks and crude inventory is rising once again. In fact US oil production rose to over 10.25mn barrel per day last week (the highest since weekly records began in 1983 and higher than the monthly data that began in 1920).

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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.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

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.

 

Precious metal flows bifurcated by gold and silver

Precious metal flows bifurcated by gold and silver

ETF Securities Weekly Flows Analysis – Precious metal flows bifurcated by gold and silver

  • Industrial metal ETPs saw the lion’s share of outflows amounting to US$130.4mn, led by outflows from broad basket ETPs
  • Precious metal ETP flows were polarised, as gold ETPs suffer the largest outflows while silver ETPs receive the largest inflows
  • Crude oil ETP outflows persist for the 12th week in a row, largely driven by WTI crude oil ETPs.

Download the complete report (.pdf)

Industrial metal ETPs break the two week winning streak of inflows, registering outflows of US$130.4mn on the back of profit taking by investors after strong price gains. The outflows were dominated by broad basket ETPs worth US$118.4mn. We expect the supply deficit to extend into 2018 owing to the lack of investment in mining infrastructure. In addition strong growth from emerging markets (accounting for 70% of demand) should support demand for industrial metals going forward.

Gold ETPs suffer outflows of US$39.6mn for the third consecutive week. Gold is poised for its biggest weekly price drop -2.63% since May as the strong jobs report released on Friday underpins the Fed’s case for tighter monetary policy, thereby curbing the appeal for the non-interest bearing bullion. The anticipation of higher U.S. interest rates coupled with progress on tax reform has helped lift the US dollar higher adding further pressure on gold prices. Furthermore the improvement in risk appetite considering the postponement of the US partial government shutdown and ongoing progress in the Brexit negotiations have diminished gold’s role as a safe haven asset. Bitcoin’s explosive appreciation has also taken some of the shine off gold. We expect gold to remain flat over the coming year discounting the likelihood of any geopolitical flare up.

Record low prices drive bargain hunters into silver ETPs attracting the highest inflows worth US$42.5mn in 10 weeks. Known to derive majority of its use in the industrial applications sector, silver looks under-priced when compared to the rally staged by the industrial metals sector. It has also lagged its precious metal counterparts owing to negative sentiment. As the narrative for improving global economic conditions remains intact, we expect silver to rebound from current levels buoyed by positive investor sentiment and rising industrial demand.

Outflows from crude oil ETPs amounting to US$20.4mn persist for the 12th consecutive week, largely driven by outflows worth US$19.3mn from WTI crude oil ETPs. We continue to believe that the OPEC led rally is likely to be short lived and the current high compliances levels are at risk of slipping as the option for a premature exit from the production cuts has been inserted. Given the current pace of oil production expansion in the US, the global supply deficit will be short lived and this is likely to weigh on prices going forward.

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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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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Price gains in industrial metals prompt strong outflows

Price gains in industrial metals prompt strong outflows

ETF Securities Weekly Flows Analysis – Price gains in industrial metals prompt strong outflows

  • Precious metals, following a period of high profit taking outflows, saw inflows of US$29m last week.
  • Industrial metals saw continued outflows of US$118m last week and has now seen outflows of US$272m over the last month.
  • Agriculture ETPs attracted US$25m of inflows last week and inflows now total US$248m year-to-date.

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Precious metals, following a period of high profit taking outflows, saw inflows of US$29m last week. Silver ETPs were the primary beneficiary with inflows of US$ 25m. The current gold/silver ratio of 75 implies that silver remains more attractively valued relative to gold. Furthermore the previously overbought positions in silver implied by the CFTC data has now corrected back to the long-term average. Recent macro data has been mixed, with delivered results broadly missing expectations, expectations for a rate hike this week remain close to zero although expectations for a December rate hike have risen to 50% as they see recent misses as temporary. We continue to believe the US FED will maintain a “dovish tightening” approach, with only one more rate hikes this year, favouring negative real interest rates to support growth.

The expected supply constriction from Hurricane Irma has prompted outflows from crude ETPs of US$15m and inflows of US$19m in to Energy ETPs which have broader exposure to gasoline. Hurricane Katrina prompted a constriction on gasoline supply and a short-lived bounce of gasoline prices due to refiners production outages. Recent improved sentiment for oil prices has likely been due to the IEA forecasts released last week showing an upward revision to it oil demand expectations for 2017 based on the weaker US dollar. Alleged improved compliance to the OPEC production freeze has also increased price.

Industrial metals saw continued outflows of US$118m last week and has now seen outflows of US$272m over the last month. Industrial metals from the beginning of September were up 35% for the year and 22% year-to-date. Since then they have begun to sell off due to what we believe is profit-taking. 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.

Agriculture ETPs attracted US$25m of inflows last week and inflows now total US$248m year-to-date, representing the best inflows of all commodity subsectors. Despite news from North Dakota and Russia that wheat harvest yields have been high investors have been buying wheat and other agricultural commodity ETPs on what we believe is a combination of price weakness and news that the probabilities of a La Niña is rising according to NOAA forecasts.

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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