Commodities: Weak sentiment

China’s slowing PMI has acted as a big dampener for most base metals.

Business sentiment in some of the key economies is down and this is afffecting commodity prices. In Germany, the Ifo business sentiment index fell to 112.9 in July from 114.5 in June, while HSBC’s manufacturing purchasing managers’ index (PMI) has contracted in Germany, China and France. For starters, analysts are not expecting crude oil to rise to $150, as was expected at the start of the calendar year, as the world grapples with deteriorating macros.

Besides precious metals – gold and silver – prices of most metals have remained subdued. Seaborne trade in iron ore is down sequentially, compared to the second half of 2010. While Macquarie believes the second half will see increased volumes, underperformance implies the 50 mtpa year-on-year supply growth estimate for 2011 seems rather stretched.

China’s slowing PMI has acted as a big dampener for most base metals. Its import of zinc concentrate has fallen 12 per cent year on year to 184,400 tonnes and lead concentrate 26 per cent to 89,100 tonnes, in June, according to Reuters data. Year to date, zinc concentrate imports are down nine per cent from the same period in 2010. In fact, depressed sentiment from China has offset the slightly positive news-flow from Swedish automotive supplier Autoliv, which indicated global light vehicle production was down by less than a per cent in Q2FY11. The anticipated fall in light vehicles has not happened, yet prices of metals have not looked upbeat.

In fact, marketmen were expecting disruption in Chile to provide support to copper prices but this has not happened.

The Union workers at the Escondida copper mine started a 24-hour strike over a series of wage contract demands that could lead to an indefinite work stoppage. However, that has not supported prices much.

Finally, according to reports, semi-soft coking coal contracts for the third quarter are settling at levels around $212 a tonne FoB Australia. This would mark a 20 per cent sequential fall, as Japanese demand for the semi-soft material has waned, amid lower blast furnace output. According to Macquarie, at only 67 per cent of the prevailing hard coking coal price, this is now well below the 80 per cent relative level achieved in recent upcycles, and with Japanese output rebounding, this discount is unlikely to widen further.