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INSIDE METALS
Friday, March 21, 2014
CHART OF THE DAY
FEATURE
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COLUMN-A conspicuous absence in China's aluminium market
The latest snapshot of global aluminium production suggests it's business as usual, or what passes as usual, in this dysfunctional market.
Andy Home is a Reuters columnist. The opinions expressed are his own
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TODAY’S MARKETS
BASE METALS: London copper steadied but was set to close down for
a fourth week running, not far above 3-1/2-year lows, as worries about
China's economy clouded the outlook for demand. Copper has been
pummelled by fears of spreading defaults in top user China that could
damage demand, but prices appear to be finding their feet, aided by
reassurance from Beijing.
Click here for LME charts
GENERAL NEWS
LIPPER AWARDS-Gold fund investors dig for deals in
the mining sector
Carlyle's commodity arm starts trading new gold and
base metals fund
PRECIOUS METALS: Gold edged up in thin trade but was on track for
its biggest weekly fall since November as the dollar firmed after the
U.S. Federal Reserve hinted at an interest rate hike in the first half of
2015. Bullion briefly touched a six-month high of $1,391.76 on Monday
on tensions in Ukraine and concerns about growth in China before investors booked profits and turned their attention to safe haven U.S.
dollar.
CME Group to launch energy, metal weekly options in
April
Osisko updates mine plan, builds case for standalone
entity
JPMorgan named top commodities bank, day after selling physical business
BTG Pactual hires Metro manager in metals warehousing push
South Africa's Amplats says NUMSA union signs wage
deal
MARKET NEWS
NICKEL/STEEL:
Australia's Rinehart seals funding for $10 bln iron ore
project
China Hebei's Jan-Feb steel output down 5.7 pct yoy stats bureau
FOREX: The dollar hovered near a three-week peak against a basket
of major currencies on Friday, but could struggle to extend gains as
investors awaited more clarity on the Federal Reserve's policy path.
Fed officials including Richard Fisher, James Bullard and Narayana
Kocherlakota are all due to speak later on Friday, after Fed Chair Janet
Yellen surprised markets mid-week by suggesting the possibility of raising interest rates early next year.
INSIDE METALS
March 21, 2014
FEATURE
COLUMN-A conspicuous absence in China's aluminium
market
State Reserves Bureau (SRB), soaking up unwanted stocks
from national favourites.
By Andy Home
The consensus view is that excess capacity and overproduction are hard-wired into the Chinese aluminium smelter
sector.
LONDON, March 20 (Reuters) - The latest snapshot of global
aluminium production suggests it's business as usual, or what
passes as usual, in this dysfunctional market.
Graphic on London Shanghai relative price performance:
http://link.reuters.com/bun77v
In the non-China world production in every region other than the
Middle East Gulf is stagnating or falling as producers shutter
higher-cost capacity.
Graphic on SHFE aluminium price and SRB auctions:
Gulf production, by contrast, is booming, reflecting the ramp-up
of the new Ma'aden smelter in Saudi Arabia and of the new expanded capacity at the EMAL smelter in Abu Dhabi.
A CONSPICUOUS ABSENCE
http://link.reuters.com/pun77v
Except that the current price of SHFE aluminium says maybe
not.
Annualised production last month in the Gulf hit a new high of
4.3 million tonnes, according to figures from the International
Aluminium Institute (IAI).
The fact that the SHFE price is so low is itself extremely unusual, defying another bit of conventional wisdom, which says
that government support, whether explicit or implicit, kicks in
somewhere in the 14,000-15,000 yuan range.
Chinese run-rates also surged by an annualised 1.1 million tonnes in February, hitting a fresh high of 23.9 million tonnes.
The most visible sign of government unease about low aluminium prices and the impact on core producers such as
Chalco has historically come in the form of SRB auctions.
The scale of the February increase is almost certainly a statistical quirk. There has been an outsize jump in national production
in the same month in each of the last four years. If the pattern is
repeated this year, expect an equally sharp fall in March.
The SRB tenders for "strategic" stocks from a small list of favoured producers, in essence moving unsold stock off their balance sheets to that of the government.
In essence, though, this too looks like business as usual. Chinese production is still trending higher with the pace of capacity
start-ups in the northwestern province of Xinjiang far exceeding
attrition of older capacity elsewhere.
There have been four such interventions in recent years.
Two, in December 2008 and January 2009, saw combined purchases of 590,000 tonnes. It was a time of crisis in the global
aluminium market, both within China and everywhere else, as
credit crunch morphed into manufacturing crunch.
But appearances may be deceptive. Something unusual is happening in the Chinese market, or to be more precise, the usual
is not happening.
There were also two interventions in November 2012 and March
2013. The SRB purchased a total 400,000 tonnes at a premium
to the SHFE price, which on both occasions was trading around
the 15,000-yuan level.
PRICE DOWN, STOCKS UP
On the Shanghai Futures Exchange (SHFE) the most actively
traded aluminium contract has this week recorded all-time lows
of under 13,000 yuan per tonne.
That should give some idea of the price sensitivities of some of
the country's biggest producers with strong links to Beijing.
The closest historical comparison is the price slump of late 2008
and early 2009, when the Global Financial Crisis was at its most
intense.
This year, however, the price has ground steadily lower with no
sign of the SRB cavalry coming to the rescue.
The Shanghai contract has also significantly underperformed
the price of aluminium traded on the London Metal Exchange
MARKET FORCES?
It's impossible to say with any certainty to what extent local governments are still helping out cash-strapped smelters with preferential power tariffs.
Which sort of makes sense, given a growing consensus that non
-Chinese producers have now cut enough production to force
the non-China market into supply deficit, while Chinese producers haven't.
Beijing, which has long targeted the sector for "blind" investment and over-capacity, increased power rates for less-efficient
smelters at the start of this year but regional governments have
in the past proved adept at cushioning local favourites from
such measures.
Indeed, stocks of aluminium in China have been trending
sharply higher since the start of the year.
The visible component, namely metal registered with the SHFE ,
has jumped from 181,644 tonnes at the end of December to a
current 326,929 tonnes.
Certainly, there is nothing in the latest Chinese production figures to suggest wholesale closures of higher-cost capacity.
That appears to reaffirm the accepted wisdom that loss-making
plants in China get subsidised, either by local governments
tweaking power rates, or by the central government, via the
But at current SHFE price levels operating margins for every
Chinese smelter are being squeezed and ever greater numbers
are operating at a cash loss.
2
INSIDE METALS
March 21, 2014
FEATURE (Continued)
But the absence of the SRB suggests that something more significant may be afoot. After all, if Beijing is not prepared to help
even its special-status operators, what does that say about the
rest of the sector?
How long is this situation sustainable?
One informed commentator, Zhang Bo, chief executive of China
Hongqiao Group, warned that "in the coming three years at least
about 30 percent of capacity" will be forced out.
Could this be an example of the State Council's October edict
promising a focus on "establishing and perfecting" market
mechanisms for dealing with over-capacity problems?
Right now, though, China is still churning the stuff out and that
spells more short-term problems for the international market.
The contrasting evolution of LME and SHFE prices this year is
likely to see China's import flows of primary metal dry up and
export flows of semi-fabricated products increase.
The SHFE aluminium price is starting to suggest so.
(The opinions expressed here are those of the author, a columnist for Reuters.)
GENERAL NEWS
LIPPER AWARDS-Gold fund investors dig for deals in the
mining sector
duce significant changes in profitability and move its stock accordingly.
By Conrad de Aenlle
Hathaway is not exactly a cheerleader for the mining business.
In his opinion, the people in charge are not the cream of the
managerial crop. But that makes it easier to spot the well-run
companies.
LONG BEACH, CALIF., March 21(Reuters) - Gold has been a
highly coveted asset for millennia, but its appeal lately has been
intermittent at best. The price of gold has climbed about 11 percent in 2014 through March 19, but is still 29 percent below the
all-time high of $1,895, set in 2011, after a dismal run last year.
"It's very easy to (outperform) because it's such a poorly managed business," he says. "The differences lie in the ability to get
returns on capital and generate good cash flow. There are huge
amounts of differentiation there."
Investors could have done worse – by investing in mining
stocks, which lost about two-thirds of their value during the decline in the price of gold.
One example: Osisko Mining Corp., whose appeal is its low risk
profile, financially and politically, Hathaway says. Osisko has a
new, profitable mine in Quebec, one of the safer places that
gold mines are found, and the company recently received a
takeover bid – "a validation of everything we thought about
Osisko," he calls it – from Goldcorp Inc. , which he also owns.
Running a fund that concentrates on mining stocks is difficult
amid such a backdrop, but John Hathaway, lead manager of
Tocqueville Gold , and Joseph Foster, manager of Van Eck International Investors Gold , have done it better than most.
Hathaway's fund was recognized at the 2014 U.S. Lipper Fund
Awards in New York on March 20 as the best precious-metals
fund for the second straight year and for its five-year performance. The Van Eck fund was honored for its 10-year results.
ROYALTY COMPANIES
Other holdings that Hathaway highlights, in part because they
help limit risk, are so-called royalty companies, notably Silver
Wheaton Corp , Royal Gold Inc and Franco-Nevada Corp . Royalty companies gain exposure to an assortment of other companies' mining projects by providing capital in exchange for the
right to buy a portion of whatever the mines produce.
The managers highlight several reasons for the decline in gold,
including reduced inflation expectations and a heightened appetite for risk that made hedging against disaster an afterthought.
Foster is less harsh than Hathaway in his judgment of mining
bosses.
"People weren't worried about risk anymore," Foster observes.
"They saw the economy getting back on track – no signs of inflation, no adverse consequences of (Federal Reserve) policies.
If people aren't worried about risk, there's no need for gold."
"There are risks in mining that you don't find in other industries,"
he says. "They do business in remote parts of the world, in different cultures and hostile climates. Things are bound to go
wrong." He also notes that costs in the industry have risen substantially over the years.
There has been a renewed concern about risk lately. Russia's
military intervention in Ukraine in early March led to a nearly 2
percent spike in gold the next trading day, one of those events
that reminds investors why they own gold in the first place – to
prepare for some problem, economic or political, that they have
no idea they need to prepare for.
Foster, a geologist by training, looks for companies with promising deposits and management that he expects to be able to
exploit them. He also owns Osisko and its suitor, Goldcorp.
Other holdings include Randgold Resources Ltd , which he says
has done "a phenomenal job of discovering and developing new
deposits" in West Africa; Tahoe Resources Inc. , which should
reach full production this year on "a world-class silver mine" in
Hathaway considers mining stocks the best way to be prepared
because they're highly leveraged to the price of the metal. Any
move above or below a company's production costs can pro-
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INSIDE METALS
March 21, 2014
GENERAL NEWS (Continued)
Separately, Carlyle, with prominent hedge fund manager Louis
Bacon and other investors, is acquiring a majority stake in metals trader Traxys Group through the U.S. Equity Opportunity
Fund, one of Carlyle's private equity funds. The investment
comes as big banks scale back on commodities.
Guatemala; and Continental Gold Ltd. , which is developing a
mine in Colombia.
Foster sees investors focusing more on risk.
"There's risk in the financial system that will drive gold much
higher," he predicts.
Aeris is the sixth fund within Vermillion, whose assets under
management fell from above $2 billion in March 2013 to around
$900 million by December.
Hathaway likewise sees enough potential banana peels in the
world to warrant a positive outlook on gold. He stresses, though,
that even if the world avoids slipping on them, exposure to the
metal is still prudent because some other perils will come along
soon enough.
Carlyle, which bought Vermillion in 2012, said in January that
Vermillion will also be responsible for one of its upcoming commodity mutual funds, called the Carlyle Enhanced Commodity
Real Return.
"The reason you own gold is for things that are inherently unpredictable," he says. "It's not something you trade; you have it
there as a diversifier."
Founded by Drew Gilbert and Chris Nygaard in 2005, Vermillion
trades agricultural products, metals, energy and staples such as
coffee, sugar and cocoa beans. Gilbert and Nygaard remain cochief investment officers at the firm.
Carlyle's commodity arm starts trading new gold and base
metals fund
CME Group to launch energy, metal weekly options in April
By Barani Krishnan
March 20 (Reuters) - Vermillion, the commodity arm of U.S.
private equity group Carlyle Group LP , started trading a new
gold and base metals fund this month as it seeks to rebuild market presence after losing more than half of its capital, people
familiar with the matter said on Thursday.
By Frank Tang
NEW YORK, March 20 (Reuters) - U.S. derivatives exchange
operator CME Group Inc said on Thursday it will launch shorter
-term weekly energy and metal option contracts beginning in
April in a bid to boost trading volume.
In a regulatory filing dated Feb. 14, Vermillion's chief operating
officer, Christopher Zuech, said the Aeris Metals Fund had
raised $122.5 million from 23 investors in total. The filing did not
state the launch date.
Chicago-based CME Group said it will launch crude oil, natural
gas, gold, silver and copper weekly options on the trading floors
and the Globex electronic platform effective Sunday, April 13 for
trade date Monday, April 14.
Carlyle spokesman Randy Whitestone declined comment.
The options, which expire on Fridays, offer participants greater
flexibility to manage risk and speculate around major U.S. economic indicators such as the monthly nonfarm payrolls, said
Miguel Vias, CME Group's director of metal products.
Aeris, focused on both physical and derivatives trading, is one of
the first commodity fund launches of the year, after a tumultuous
2013 when institutional cash left the space to chase a rally in
equities. Commodity-focused hedge funds were also roiled by
lower volatility last year.
Vias said the products also offer a new opportunity to arbitrage
with the options of the SPDR Gold Trust , the world's largest
gold exchange-traded fund. The gold ETF options also expire
on Fridays.
Trading at Aeris will be overseen by Greg Buechele and James
Tatum, both portfolio managers for precious and base metals at
New York-based Vermillion Asset Management, sources said.
"Structurally, they fit a need that the market doesn't have right
now," said Vias. "If we start to get volatility in the short term,
they offer people a real opportunity to protect themselves and to
speculate."
Buechele was a commodity index products manager and timber
trader at Goldman Sachs before he joined Vermillion in 2007 to
assist in trading base and precious metals and develop livestock
market strategies.
CME Group said the new products are based on the popular
weekly options in other asset classes such as interest rates,
equities and agricultural products.
Tatum was head of European base metals trading at Ireland's
Susquehanna Investment Group before joining Vermillion in
2011.
In 2012, CME Group also launched short-term gold options,
which offer daily expiration five business days forward. Those
options are rarely traded due to low interest.
Despite Vermillion's ups and downs in commodities, it has "won
a liking for its physical premium play in metals, combined with
options trading", said the manager of a rival metals hedge fund
in New York.
COMEX gold options floor trader Jonathan Jossen said the
weekly options could very well boost trading volume for the
CME Group because new option products are likely to increase
trading flows to its existing monthly options.
"That's one reason they've been able to get good support from
outside investors for this new venture," he said.
4
INSIDE METALS
March 21, 2014
GENERAL NEWS (Continued)
The new product could also help the CME Group win market
share from the over-the-counter option market, which offers
more customized products in terms of duration and strike prices,
traders said.
shown up," he said. "I can't give any details on it, but I can say
the process has increased in size, not decreased."
Roosen, who also addressed shareholders and analysts at an
investor presentation in Toronto, stressed that he sees investors
standing to benefit the most if Osisko remains an independent,
standalone entity.
"If it was to catch a following and have open interest and market
makers providing liquidity, I would be interested to participate in
that market," said Albert Ng, a market maker in COMEX gold
options and portfolio manager at Aurum Options Strategies.
"My message to shareholders is you do not need a transaction
right now. This mine's running fine and it's going to outperform
on every metric," he said.
Osisko updates mine plan, builds case for standalone entity
JPMorgan named top commodities bank, day after selling
physical business
TORONTO, March 20 (Reuters) - Osisko Mining Corp on
Thursday released an updated mine plan for its flagship Canadian Malartic gold mine in Quebec and the miner stressed that
the C$2.9 billion ($2.6 billion) hostile bid from larger rival Goldcorp significantly undervalues its asset base.
By David Sheppard
LONDON, March 20 (Reuters) - JPMorgan commodity chief
Blythe Masters laid out an ambitious plan four years ago to become the top Wall Street bank in energy and metals trading.
Montreal, Quebec-based Osisko's new mine plan envisages an
increase in gold output along with a sharp drop in production
costs on the back of improved ore grades and a weaker Canadian dollar.
Last year Masters achieved that goal, a closely watched report
said on Thursday, the day after the bank announced the sale of
the giant physical commodities operation she had assembled.
UK analytics firm Coalition's annual sector league table showed
JPMorgan had the largest revenues of any investment bank in
commodities last year, leapfrogging last year's winner Goldman
Sachs , which was second ahead of Morgan Stanle.
The improved mine economics, coupled with the recent rally in
the price of gold, highlight how Goldcorp's bid undervalues the
company, said Osisko's chief executive officer, Sean Roosen.
"The fundamental problem we have here is that the value gap is
far too large. We had a damaged gold space coming out of
2014. Goldcorp, to their credit, tried to take advantage of that,
but we are now in March and it is a different gold market and our
shareholders are in a different state of mind," said Roosen in an
interview with Reuters.
For Masters it is something of a Pyrrhic victory, with the rump of
the business she built now going to Swiss commodities trader
Mercuria in a $3.5 billion deal. The bank announced it was selling its physical commodities business last summer in the face of
unprecedented political and regulatory pressure after a $410
million settlement with U.S. regulators over allegations of power
market manipulation.
Goldcorp launched the unsolicited cash-and-stock bid in January to win control of Osisko's Malartic gold mine. Based on
Goldcorp's latest closing price, the bid currently values Osisko
at C$6.63 a share. Osisko's Toronto-listed stock closed Thursday at C$7.59 a share, indicating that investors expect a sweetened bid to emerge.
Other pressures also contributed to the decision.
Total commodity trading revenues on Wall Street have fallen by
about two-thirds in the last five years, with the top 10 banks
notching just $4.5 billion last year, according to an earlier report
by Coalition.
Shares in both Osisko and Goldcorp have risen significantly
since January, along with the price of gold. Although the price of
spot gold has pared gains this week after touching a six-month
high of more than $1,390 an ounce, it continues to trade at
around the $1,333 an ounce level, well above where it was at
the beginning of the year.
That is down from more than $14 billion at its peak in 2008,
when the bumper returns earned by sector stalwarts Goldman
and Morgan Stanley encouraged many other banks to expand
into energy and metals trading.
While JPMorgan was a relative late comer to large-scale commodities dealing, Masters was the architect of a multi-billion
dollar expansion plan that saw the bank buy or absorb oil, electricity and metals desks from firms such as Bear Stearns, UBS,
and RBS Sempra.
"Our shareholders are telling me that they're more bullish than
they were in January and they're standing in with us," said
Roosen, adding that he is confident that Goldcorp's current bid
will fail to win over the majority of Osisko's shareholders.
By August 2010, Masters was telling employees that Goldman
and Morgan Stanley should be "scared" of JPMorgan's newlyexpanded commodity operation, Bloomberg reported.
Roosen said a stronger bullion price has also boosted the level
of interest in the company from potential rival suitors.
"As the gold price has strengthened and people have gotten
healthier there are more and more interesting players that have
"They'd better be, because this is a platform that's going to win,"
Masters said.
5
INSIDE METALS
March 21, 2014
GENERAL NEWS (Continued)
JPMorgan's own internal review of the business last year concluded the returns from commodities weren't worth the capital or
regulatory risks.
South Africa's Amplats says NUMSA union signs wage
deal
A source close to the bank said on Thursday it was too early to
say what the future held for Masters, adding that she and her
management team had been primarily focused on achieving the
sale.
JOHANNESBURG, March 20 (Reuters) - Anglo American Platinum said it signed a wage agreement with the National Union
of Metalworkers of South Africa (NUMSA) on Thursday, ending
a six-week strike, with no end in sight to a longer stoppage by
another larger union.
"Our goal from the outset was to find a buyer that was interested
in preserving the value of JPMorgan's physical business," Masters said of the sale to Mercuria on Wednesday.
The agreement will see wage increases of up to 8.5 percent for
the members of NUMSA.
The Coalition league tables ranked BNP Paribas, Barclays and
Deutsche Bank as the second tier of commodity banks, followed by a third tier filled by Citi, Bank of America Merrill Lynch
UBS and Credit Suisse.
The Association of Mineworkers and Construction Union
(AMCU), by far the largest union at Amplats' operations, is still
on an eight-week strike that has cost companies and workers
billions of rand in lost revenue and wages.
Coalition does not rank the banks individually outside of the top
three.
NUMSA represents about 2,500 workers at Amplats who work
mainly in the company's smelters.
BTG Pactual hires Metro manager in metals warehousing
push
Amplats spokeswoman Mpumi Sithole said NUMSA workers
would return to work on the Thursday night shift but the AMCU
strike rumbles on.
Talks have collapsed between AMCU and the world's top platinum producers - Amplats and two rivals, Impala Platinum and
Lonmin - over the union's demands for a more than doubling of
entry-level wages over the next three years, which the companies say they cannot afford.
LONDON, March 20 (Reuters) - Brazilian investment bank BTG
Pactual
has hired a former manager at Goldman
Sachs' warehouse company Metro International as it expands
its own metals storage business, sources with knowledge of the
situation said.
Amplats and its peers have offered increases of up to 9 percent
to AMCU, the biggest union by far on South Africa's platinum
belt.
Warehousing marketing manager Gabriella Vagnini left Metro
after six years earlier this month, to join BTG Pactual in a similar
role, the sources said.
"The increases on offer are already significantly above the current inflation rate and therefore the company encourages AMCU
to also accept the current offer," Amplats said.
BTG, controlled by billionaire financier André Esteves, last year
made a bold push into the global commodities trading and storage business just as other banks bowed out, betting it can avoid
the regulatory pressure rattling rivals.
The AMCU strike is the biggest on the mines since apartheid
rule ended in South Africa in 1994 and has cost the companies
over 9 billion rand ($825 million) so far and counting in lost revenue.
The Sao Paulo-headquartered bank in August hired Shon Loth,
a metals warehousing expert formerly with Noble, to build up its
own storage business. More recently the bank has applied to
register its warehouses with both the London Metal Exchange
(LME), the world's biggest metal market, and with the U.S. exchange CME Group expects the LME to approve its first two
warehouses, one in Detroit and one in Owensboro, United
States, within a couple of weeks, the sources said.
BTG and Vagnini declined to comment.
Last year, BTG expressed interest in buying JPMorgan Chase &
Co's physical commodities business including the Henry Bath
warehousing unit, but JPMorgan said on Wednesday it is selling
it to trader Mercuria for $3.5 billion.
6
INSIDE METALS
March 21, 2014
MARKET NEWS
nes in a forecast seaborne iron ore supply of 1.6 billion tonnes
that year.
Australia's Rinehart seals funding for $10 bln iron ore project
The mine is expected to reach full capacity by the end of 2017
or early 2018, when a contract with Downer EDI , which has
been lined up to operate the mine for the first few years, is due
to expire. The project has long been a dream of Rinehart, who
inherited valuable mining tenements from her father but has
never actually built a mine.
By Sonali Paul
MELBOURNE, March 21 (Reuters) - Australian billionaire Gina
Rinehart has secured $7.2 billion in debt for her Roy Hill iron ore
mining project, completing all the funding for a giant mine in
Western Australia due to start exporting in late 2015.
Given the lack of experience, the project took longer than expected to fund, while a family court row over Rinehart's inheritance two years ago also drew attention away from the development. Roy Hill was advised by National Australia Bank and BNP
Paribas, while POSCO, Marubeni and China Steel Corp were
advised by Rothschild.
The 55-million-tonnes a year mine will make Roy Hill Australia's
fourth largest iron ore producer, adding to a looming supply glut
built up by bigger rivals Rio Tinto , BHP Billiton and Fortescue
Metals Group .
"We look forward to becoming a major iron ore producer on an
international scale," Rinehart, chairman of Roy Hill and Asia's
richest woman, said in a statement.
China Hebei's Jan-Feb steel output down 5.7 pct yoy -stats
bureau
The $10 billion project is already 30 percent built, the company
said, including dredging for two deepwater port berths, an airport with a runway big enough for a Boeing 737 plane and villages to house 3,600 construction workers and 2,000 operational staff on site and at Port Hedland.
BEIJING, March 21 (Reuters) - China's Hebei province produced 32.636 million tonnes of crude steel in the first two
months of 2014, down 5.7 percent compared to the previous
year, reflecting a funding crisis that has left at least 16 local producers on the brink of closure.
The debt financing, the biggest ever provided for a mining project, is made up of loans and guarantees from five Export Credit
Agencies from Japan, South Korea and the United States and
19 commercial banks from Australia, Japan, Europe, China,
Korea and Singapore.
The bloated steel sector in northern Hebei is the main focus of a
nationwide government campaign to tackle industrial overcapacity, cut sources of air pollution and ease the Chinese economy's
dependence on resource-intensive sectors.
Rinehart's Hancock Prospecting Pty Ltd owns 70 percent of the
project, with Japanese trading house Marubeni Corp holding 15
percent, South Korean steel giant POSCO 12.5 percent and
Taiwan's China Steel Corp 2.5 percent.
Data issued by China's statistics bureau show Hebei's production over the first two months still amounted to 24.9 percent of
the national total, down from 26.9 percent in the first two months
of 2013 but recovering from November and December, when its
share fell to less than 20 percent.
The funding was precedent-setting not only in size, but also in
that the owners did not have to provide a completion guarantee
to the lenders, and the Japanese trading house Marubeni was
willing to put up equity for the project ahead of debt being lined
up, a banker familiar with the deal said.
Overall steel production in the first two months rose by 1.7 percent on the year to 130.8 million tonnes, which amounted to a
record daily high of 2.22 million tonnes a day.
The impending iron ore oversupply is unlikely to deter Rinehart
and her partners from going ahead with the project, despite major banks forecasting iron ore prices will fall to around $80-$90 a
tonne, about 23 percent below current prices.
The January-February output decline in Hebei, traditionally
China's dominant steel producer, was offset by double-digit increases in the provinces of Jiangsu, Fujian, Henan and Hunan.
Last year, Hebei produced 188.5 million tonnes of crude steel,
amounting to 24.2 percent of the country's total and more than
the whole of the European Union combined.
The mine is expected to be cash flow positive even if prices fall
that low, the banker said. He declined to be named as the terms
of the deal were confidential. In contrast to the objectives of a
major miner, the Roy Hill mine was designed to help meet POSCO's strategy of locking in raw materials supplies for its steel
mills to hedge against price shocks, said UBS commodities analyst Tom Price.
But its governor Zhang Qingwei said earlier this month that total
annual production capacity actually stands at 286 million tonnes.
Zhang revealed at a Hebei delegation meeting on the sidelines
of the national parliament that 16 out of 148 steel enterprises in
the province had stopped production as a result of "operating
problems" brought about by a credit crunch as well as a decline
in demand.
"It would have been a good strategy five to seven years ago,
when we did go through big price shocks and supply uncertainty," Price said. "But now there's so much ore coming on to
the market, I'm just wondering if it's necessary to push ahead
with these sorts of projects."
To tackle the debilitating overcapacity problems in the sector,
which have sapped steel product prices and left many mills in
heavy debt, Hebei plans to close 60 million tonnes of low-quality
crude steel production by the end of 2017, with 15 million tonnes
set to be shuttered this year.
UBS expects Roy Hill to produce 15 mln tonnes of iron ore in
2016, contributing to a hefty surplus of around 270 million ton-
7
INSIDE METALS
March 21, 2014
ANALYTIC CHARTS (Click on the charts for full-size image)
Daily LME Aluminium 3-months
Daily LME Copper 3-months
Daily LME Nickel 3-months
Daily LME Zinc 3-months
Daily LME Lead 3-months
Daily LME Tin 3-months
Daily LME Alloy 3-months
Daily LME Nasaac 3-months
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INSIDE METALS
March 21, 2014
MARKET REVIEW
METALS-Copper prices eye fourth weekly loss on China
worries
PRECIOUS-Gold heads for biggest weekly fall in four
months
By Melanie Burton
SYDNEY, March 21 (Reuters) - London copper steadied but
was set to close down for a fourth week running, not far above 3
-1/2-year lows, as worries about China's economy clouded the
outlook for demand.
Copper has been pummelled by fears of spreading defaults in
top user China that could damage demand, but prices appear to
be finding their feet, aided by reassurance from Beijing.
Premier Li Keqiang said China will speed up investment and
construction plans to ensure domestic demand expands at a
stable rate - an indication authorities are considering practical
measures to support slackening economic growth.
"The big collapse that happened in copper last week is not likely
to repeat," said Helen Lau, senior mining analyst at UOB-Kay
Hian Securities in Hong Kong.
By Lewa Pardomuan
SINGAPORE, March 21 (Reuters) - Gold edged up in thin trade
but was on track for its biggest weekly fall since November as
the dollar firmed after the U.S. Federal Reserve hinted at an
interest rate hike in the first half of 2015.
Bullion briefly touched a six-month high of $1,391.76 on Monday on tensions in Ukraine and concerns about growth in China
before investors booked profits and turned their attention to safe
haven U.S. dollar.
Cash gold added $5.91 an ounce to $1,333.80 an ounce, having fallen to $1,320.24 on Thursday, its weakest since endFebruary. Low interest rates, which cut the opportunity cost of
holding non-yielding bullion above other assets, had been a key
factor driving bullion to all-time highs in recent years.
"I think the gold market has already shifted its focus back to the
U.S. dollar and U.S. monetary policy outlook. The Fed is the
main theme which is pressuring the market now," said Joyce
Liu, investment analyst at Phillip Futures in Singapore.
"There are signs gold is supported at about $1,320 level, but I
think the market is looking for direction. Although it has rebounded quickly, there's simply no impetus to go beyond
$1,335. It's basically consolidating between $1,325 and $1,335."
A "golden cross" on the chart of spot bullion following a threemonth rally suggests prices could climb further this year even
after the Federal Reserve is set to keep trimming its bondbuying stimulus, analysts said.
U.S. gold was at $1,334.30 an ounce, up $3.80.
Asian markets found their footing on Friday after Wall Street
shook off concerns about Federal Reserve policy, while this
week's spike in U.S. yields kept the dollar underpinned near
three-week highs.
"Going forward, a worsening fundamental outlook and the dollar
appreciation suggests there will still be a downward trend, just at
a much slower pace," she added.
Three-month copper on the London Metal Exchange edged up
by 0.1 percent to $6,436 a tonne by 0334 GMT.
Prices, which slid to the lowest since mid-2010 on Wednesday
at $6,321 a tonne, are set for a half a percent loss this week.
The most-traded June copper contract on the Shanghai Futures
Exchange rose by 0.4 percent to 45,090 yuan ($7,200) a tonne.
Reflecting an improved outlook for supply that has continued to
suppress prices, the global copper market turned in a production
surplus of 34,000 tonnes in December, data from the International Copper Study Group showed.
China's yuan fell to a 13-month low on Friday and was set to
post its biggest weekly fall after the central bank lowered the
midpoint of its permitted trading range, which is seen as a signal
of official comfort with the currency's recent losses.
Along side an unfavourable differential between local and global
prices, a weaker yuan impedes China's demand for copper imports because credit terms become more expensive.
"The fall in Chinese imports of refined copper vs increase in
exports is likely to reduce Chinese net imports of refined copper
from an average of 225,000 tonnes/month in 2013 to perhaps as
little as zero over the coming months," said Natixis in a research
note.
Markets await comments from a quartet of Fed speakers later
on Friday. St. Louis Fed President James Bullard, Dallas Fed
President Richard Fisher, Minneapolis Fed President Narayana
Kocherlakota and Fed Governor Jeremy Stein are all due to
talk.
The physical sector noted light buying from jewellers, but demand from main consumer China remained slow because of the
weak yuan. Premiums for gold bars in Hong Kong were unchanged from last week at $1 an ounce to the spot London
prices.
China's yuan fell to a 13-month low on Friday and was set to
post its biggest weekly fall after the central bank lowered the
midpoint of its permitted trading range, which is seen as a signal
of official comfort with the currency's recent losses.
Weakening differentials between 99.99 percent purity gold on
the Shanghai Gold Exchange and cash gold discouraged imports. "Shanghai gold exchange is still at discounts to spot gold,
and the market wants to know if the yuan will continue to depreciate," said a physical dealer in Hong Kong.
Looking ahead, the gold market has priced in tensions in
Ukraine, which means a rebound could be capped at around
$1,350 an ounce, he said. U.S. President Barack Obama raised
the stakes in an East-West confrontation over Crimea on Thurs-
Reflecting deteriorating demand for metal held in China's
bonded zones, premiums for bonded stocks in China continue to
fall, by $10 overnight to $105-$125, according to China price
provider Shmet. (http://www.shmet.com/)
In news, Vermillion, the commodity arm of U.S. private equity
group Carlyle Group LP , started trading a new gold and base
metals fund this month as it seeks to rebuild market presence
after losing more than half of its capital, people familiar with the
matter said on Thursday.
Keeping risk appetite at bay, U.S. President Barack Obama
raised the stakes in an East-West confrontation over Crimea on
Thursday by targeting some of Russian President Vladimir
Putin's closest long-time political and business allies with personal sanctions.
9
INSIDE METALS
March 21, 2014
MARKET REVIEW (Continued)
The euro held steady at $1.3780 , having plumbed a two-week
low of $1.3749 on Thursday. The euro was on track to post a
roughly 1 percent drop this week.
"Euro seems to have formed a pretty good top, $1.3850 area,
so I'm thinking to sell into any headline-induced spikes," said
Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore,
referring to the euro's near-term outlook.
Not helping the common currency, European Central Bank Executive Board member Sabine Lautenschlaeger said on Thursday rates will remain low or go even lower for an extended period. YUAN HITS 13-MONTH LOW
The Chinese yuan hit a 13-month low after the central bank
lowered the mid-point of its permitted trading range, which is
seen as a signal of official comfort with the currency's recent
losses.
day by targeting some of Russian President Vladimir Putin's
closest long-time political and business allies with personal
sanctions. Gold jewellery exports from India edged higher by 1
percent in February to $718.36 million from a year earlier, an
industry body statement said on Thursday.
FOREX-Dollar pauses before Fed speakers; yuan hits 13month low
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, March 21 (Reuters) - The dollar hovered near a three-week peak against a basket of major currencies on Friday, but could struggle to extend gains as investors
awaited more clarity on the Federal Reserve's policy path.
Fed officials including Richard Fisher, James Bullard and Narayana Kocherlakota are all due to speak later on Friday, after Fed
Chair Janet Yellen surprised markets mid-week by suggesting
the possibility of raising interest rates early next year.
U.S. yields have all moved higher as markets brought forward
the risk of a Fed rate hike by April.
Still, market participants seem to have differing views on the real
intentions behind Yellen's comments, said Teppei Ino, Singapore-based analyst for Bank of Tokyo-Mitsubishi UFJ.
"One person might say it was a slip of the tongue, while another
may say that the comments were made very much on purpose,"
Ino said.
The yuan has tumbled more than 1.2 percent so far this week
after the central bank last weekend doubled the currency's permitted trading range to 2 percent either side of the fixing.
Even if it stabilises on Friday, the fall would be the biggest
weekly loss for the yuan, based on Thomson Reuters data going back to 1992.
Markets, already fretting about slower growth in the world's second-biggest economy, fear the sharp drop in the yuan could add
more pressure on Chinese companies saddled with foreign currency debt and expose holders of offshore yuan derivatives to
heavy losses.
Elsewhere, the dollar struggled to make further gains on the
Japanese yen after topping out at 102.69 on Wednesday. The
dollar last stood at 102.39 yen, staying in a narrow range in Asia
with Japanese markets shut for a holiday.
The greenback also lost steam against the Canadian and Australian dollars. It last traded at C$1.1247 after reaching a 4-1/2
year high of C$1.1279 on Thursday, while the Aussie edged up
0.2 percent to $0.9058 .
The dollar index last traded at 80.188 , not far from a high of
80.354 set on Thursday, a level not seen since late February.
"A heavy Fed speaker calendar Friday will be carefully parsed
for any effort to roll back this week's shift forward in tightening
expectations," analysts at BNP Paribas wrote in a note to clients. However, they noted that most of the Fed speakers are
generally on the hawkish end of the spectrum.
"In any event, we would expect the Fed to struggle to fully reverse the move in rates...unless data begins to significantly disappoint expectations once again."
U.S. data on Thursday was mixed but a rebound in factory activity in the Mid-Atlantic region held out hope the economy might
be regaining strength after being hobbled by severe weather.
The dollar showed little reaction after Fitch Ratings affirmed the
United States' credit ratings at "AAA" with a stable outlook, removing the country from negative watch.
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