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Commodity Index
Controversial
Quiz time:
1. When was the last time we saw the Thomson Reuters CRB index fall this low? Here are
the choices:
1. 2009
2. 2008
3. 2002 – Correct
2. Show of hands – who thinks China fudged with its exchanged rates to boost exports?
Show of hands. How many disagree and think China changed the way it pegs its
currency because it wants to achieve “reserve currency status” – our read of the data is
that it was the later idea and not the former though we note the curious timing and
we’ll leave you all to form your own opinions.
Wonky:
1. We believe 40% of individual price movements are due to fluctuations and price
movement within all commodities (Yes, tallow, corn, soybeans and oil) that’s why we’re
looking at this chart
2. And yes, I’m including all forms of steel in that blanket statement
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Industrial metals index
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In the spring of 2011 the dollar started a new bull market, (which coincided with the peak
of commodity prices).
Ever since, the dollar trended up while commodities trended down.
Summer of 2014 when the dollar made a decisive move, sharply rising to a 11-year high.
This caused commodities (and therefore base metals) to plunge.
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Red arrows indicate the inflexion point from when the dollar started its bull run and
commodities started their descent – both at the same time.
Dollar/Commodity Index
Controversial:
1. For over a year the USD index and the CRB commodity index were essentially in perfect
inverse harmony. As the dollar went up, commodities went down.
2. For the past year, anyone following us or tracking this macro economic indicator had a
really good gauge of the health of commodity markets
3. But look what happened over this last 30 days – our little perfect inverted correlation
got ruined. Completely foiled and now they are moving in the same direction
Wonky:
1. Statistical correlations we look for 70% correlation or greater – the irony is that we still
may have that but inverted.
2. If you follow-up with me next month, I’ll let you know what our statistical analysis told
us on this correlation
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We believe commodities will turn when the Shanghai stock market finds its bottom. Right
now it hasn’t found its bottom
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The really big driver though involves China GDP growth…
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Controversial:
1. From a fundamentals perspective – slowing China demand from the largest
aluminum consumer in the world has led to a sharp aluminum sell-off
2. The Caixin index dropped to 47.3, down from 47.8 in July — the lowest figure for
China since 2009.
3. Aluminum production costs have absolutely nothing to do with current price
levels
4. Just a comment on the MW premium – that has held relatively stable now at
about $.075-.08/lb due to stronger aluminum demand and a delay in US Fed
rate hikes.
Wonky:
1. Aluminum prices have fallen for the past 4 months and we could see some
bottom feeders come in to cover their shorts so we could see a little bounce
2. You see these red and green lines on this chart and you will see it for each of the
others. They represent where we have pegged the short term price range that
would indicate to us that the trend remains in effect. If the price breaches the
red line, that would signal a shift in short-term market sentiment and if the price
falls below the support level (it did last month) that would tell us that the price
is collapsing, which it is doing now.
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Controversial:
1. Zinc has been a bit on a wild ride briefly dropping below our support level last
month and climbing back a bit. But make no mistake about it, zinc remains in
oversupply but this goes to why we don’t pay a lot of attention to fundamentals
though everyone else really does – prices move based on investor sentiment,
not actual supply and demand considerations.
2. The big reality for zinc? China used to be a big consumer of refined zinc but not
anymore. It’s buying more raw material and less processed material – the zinc
picture lies within the Chinese import data
Wonky:
1. Though zinc has shown more upside movement than most of the other base
metals in 2014, the data is not wowing us – a rise in zinc production and the
sheer fact that China is now a producer not a buyer of refined zinc combined
with weak demand still provides us with bearish signals
2. Nevertheless, investors determine price, not us and not fundamental factors
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HRC closed at $459/st.
Controversial:
1. HRC performed “better” than some of the other forms of steel and even base metals
for that matter and all of the data suggests to us that all the major forms are showing
us bearish signals.
2. Though some in this audience may disagree, we don’t see the trade case having any
impact on prices at least short-term, only perhaps on import levels
3. Like you, we think MOH inventory provides one of the best current state assessments
of US demand and that data still looks weak.
Wonky:
1. HRC pricing from China has been a slow and steady descent – prices seem to take about
8 weeks on a plateau and then continue down. Right now we are in the second month of a
price plateau; Prices have fallen by nearly 40% since August of last year.
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CRC $587/st
Controversial:
1. We think the current trade case will be interesting in terms of testing some of the
enforcement elements of the new trade legislation; perhaps controversially we
know for a fact that steel goods are often transshipped meaning that they are
coming from China but are getting shipped to another country to claim origin to
avoid duties or dumping orders. It will be interesting to see how this plays out for
not only CRC but other forms of steel as well.
2. Inventory levels for CRC appear a bit healthier than HRC but still higher than
“healthy norms”
3. Our short term outlook for CRC is similar to HRC and we don’t see any
immediate data supporting a trend reversal
Wonky:
1. Imports shot up 18% in July from June and imports are up 13% YTD despite a
trade case!
2. China CRC prices have fallen 41% from August of 2014
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HDG $567/st
Controversial:
1. We saw a 3.5% drop in prices from last month to this month despite a big jump
in imports – a 13% increase from June to July and a 20% increase YTD despite
the trade case
2. We are bothered by China automotive numbers for 2 reasons. One obvious and
one less so
a. Poorer demand in China is obviously impacting overall demand and acting
as a drag on the numbers
b. But we’re watching how China is recalibrating its production in line with
demand (if you are raising your eyebrows so are we) and that’s our point –
there is no adjustment down of production so that metals is floating around
and given my earlier point of transshipment, it’s not a surprise if we see a lot
of excess HDG material
Wonky:
1. China automotive bad news – Auto sales are down now 4 years in a row.
2. The good news – construction in China is getting wrapped up in all of the China
bad news – actually there are some bullish construction indicators within China
– “Yet the barrage of bearish headlines about share prices has obscured news of a
property rebound. House prices have perked up nationwide for three straight months.
Two months after the stockmarket first crashed, this upturn continues.”
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3. Ironically China HDG prices have fallen “the least” of any of these 4 forms of metal from
a year ago perspective, dropping only .5% from August of 2014 until today. But this past
month, HDG was the only form of steel to see a China price decline.
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Plate: $573/st
Controversial:
1. If you talked to some of the plate service centers earlier this year they were
secretly discussing gloom and doom scenarios – meaning inventory was
unbelievably high, up over 3.5 MOH and orders were extremely weak in the
spring. We heard service centers use the phrase “not this bad since 2009”.
However, the situation has gotten better since spring.
2. Import volumes are declining which is what is helping service centers work down
their inventory levels
Wonky:
1. We note that China plate prices have also nudged up this past month but have
still fallen by some 32% from a year ago.
2. Again, even though steel is not an exchange traded metal like the base metals,
each of the four forms of steel still follow the same market sentiment as
commodities as a whole as well as industrial metals
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They've put nickel, zinc and copper in their "most preferred" sectors of metal. OMG.
They are smoking crack. Lead and Tin would be the two, not those 3 and I'm bearish
on all until we start to see prices notching up.
"The steel markets of the US (& Canada) now appear supported on both
quantitative and fundamental bases. We expect US steel prices to lift from Nov-15,
on slowing imports and a draw-down in inventories. Underlying ex-energy demand
growth remains robust."
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