Metal and energy prices eased as the US dollar rallied following the release of a 2½-year high US ISM manufacturing survey Friday. The US survey followed release of better-than-expected manufacturing PMIs in China, with the official measure firming to 51.4 in October, from 51.1 in September and 51.2 expected by the market. The Markit survey, which focuses proportionally more on small-to-medium enterprises, also came in ahead of expectations at 50.9 in October, from 50.2 in September and 50.7 expected. The firmer global PMIs suggest ongoing gradual stabilisation and acceleration of economic growth and commodity demand, across an expanding number of major economies.
Spot iron ore prices rallied USD3.40/t on Friday as Chinese steel mills sought to restock inventories after a mild destocking since the National Day holiday in early October, and following comments by Xi Jinping that China needs to “increase the housing supply at all costs” with no comments on house prices. Later this month, mills will likely undertake a further restock process as domestic iron ore in China becomes more scarce owing to mines in the north shutting due to the approaching winter.
BHP Billiton has scrapped plans to build a USD5b coal export rail line and new terminal at Abbot Point in Queensland. The 60Mtpa project was determined to be unnecessary given existing excess coal export capacity in Queensland at the moment.
Japan’s Pan Pacific, one of the country’s largest copper smelters, set 2014 premiums for Chinese buyers at USD123/t, up 45% from 2013 levels, on expectations of strong refined copper demand and current high physical premiums.
One of China's top corporate officials has reassured Australian miners the process of urbanisation in the Asian nation has several decades to run and will continue stoking strong demand for minerals.
In words that will comfort Australia's massive iron ore export industry, Chinalco boss Xiong Weiping said about 52 per cent of Chinese people lived in urban areas and that rate had been increasing about 1 per cent each year.
''Based on this speed, urbanisation will continue to boost China's domestic demand for at least 30 years before it reaches the rate of 80 per cent,'' he said.
Speaking at a Melbourne Mining Club event in Beijing, Mr Xiong said China's demand for minerals had traditionally been higher than the nation's overall economic growth, which meant demand for minerals and commodities should be stronger than the expected growth rate of 7.5 per cent in coming years.
''If China's future GDP growth stands at 7.5 per cent, the growth rate of China's demand for minerals will be above 7.5 per cent,'' he said.
''It's worth mentioning that China will enter a key stage of accelerating industrialisation and urbanisation in the next 10 years and even longer, when the demand for mineral resources will continue to be strong.
''All international mining companies should grasp these rare opportunities in China's mining industry and make the best of it.''
The comments come after a year of debate in Australia about the mortality of the ''China mining boom'', with some such as former prime minister Kevin Rudd declaring the lucrative phase to be over.
RIO Tinto chief executive Sam Walsh has declared China's iron ore appetite is showing no signs of ending, as the regional areas of the world's fastest growing nation start to industrialise.
In a speech to the Melbourne Mining Club in Beijing last night, Mr Walsh said it was likely China's next phase of economic growth would come outside the major cities and provinces.
The Chinese economy is forecast to grow by at least 7.5 per cent this year, meeting the government's official target. However, it is forecast that country areas of China are still growing by at least 10 per cent.
Rio Tinto yesterday marked its 30th anniversary of operating in Beijing by signing a memorandum of understanding to develop new technology with its major shareholder Chinalco, the state-owned mining firm.
Mr Walsh said he believed there were still international "misconceptions" surrounding China's future economic growth.
"It (China) is not all skyscrapers and Gucci stores. There are still hundreds of millions of people in the central and western regions who are waiting for modern infrastructure and the urban lifestyle that it supports," he said.
"Meeting those development needs will require more construction, which in turn will require more iron ore, more copper, more bauxite and more energy to power it all."
The new Coalition government and Australia's major mining companies have been quick to confirm the China resources boom has yet to end.
A new report by the Centre for Independent Studies released this week showed that while China's industrialisation process was well under way, 13 per cent of the population still lived in poverty. A survey in the report showed more than a quarter of the population also believed that their living conditions would improve as the nation's economic development progressed.
The income from sales of ore is going to be extremely concentrated in the hands of a relatively few Australian owners of shares in the relevant companies and largely in the hands of overseas lenders and equity holders.
The competing force against increased national income is going to be falls in average and median wages and higher unemployment, irrespective of interest rates, unless the Australian Government has a massive infrastructure program fully planned and authorised within about 18 months.
The supply of real estate for development is not likely to increase dramatically within the next 2 years as a means of stopping house price rises.
It seems that real estate, share and bond price bubbles as a function of emergency low interest rates supported by QE is going to be with us within 2 years unless the US market crashes from its QE and financial repression inspired boom in share prices or Europe explodes.
My gratuitous advice to Treasury and government is don’t waste the coming recession. Reduced employment in mining/engineering construction and emergency low interest rates with low private investment are the perfect storm for creating conditions for massive infrastructure replacement and upgrade.
Tony Abbott will be presented with the greatest opportunity for efficient infrastructure building since the post second world war conditions. It would be a disaster to waste it be destroying a generation as has been done in Europe, or creating a crisis through supporting the banks, or by foodstamps and unemployment benefits as has been done in the US.
CHANGES to the way iron ore is priced cost Chinese importers about $US444 million ($467.7m) a month in the first 1 1/2 years of the system, a study shows.
The campaign led by BHP Billiton to replace the benchmark system with spot market pricing was equivalent to a price increase of 7.1 per cent and added $US7.1 billion to Australian exporter revenues, according to the study by Australian National University researcher Luke Hurst that looked at the period between April 2010, when the system was introduced, to December 2011.
By shifting freight costs to the producer, it also enabled Australian exporters to reclaim the cost advantage they hold over Brazil because of their proximity to the Chinese market.
"Since the switch to the spot market mechanism, Australian exporters have received on average $US13.29 a tonne more than Brazilian exporters for the same quality ore to China," Mr Hurst said.
Mr Hurst said the shift in revenue from the Chinese importers to the Australian exporters was "pretty spectacular" given the state of the Chinese steel industry, which averaged profits of less than $US60m a month over the first half of this year.
The benchmark pricing system established by the Japanese in the 1960s assumed the importers carried all the freight cost because they owned the ships. The same "free on board" (FOB) price was settled with Australian and Brazilian exporters, notwithstanding that Australia is less than one-third the distance to Asia.
The freight differential between Australia and Brazil rose from $2.78 a tonne in 2002 to reach a peak of $57.91 by late 2007, with the shipping industry unable to keep up with China's demand for iron ore.
In October, iron ore exports from Port Hedland in Australia rose by 33% y/y to 28.94Mt. Iron ore exports to China from the port advanced 42.9% y/y and 9.7% m/m to a record high of 25.2Mt.
Base metals and gold futures declined on concerns the US Federal Reserve may taper stimulus sooner than the market expects after the US non-manufacturing sector grew faster than expected in October. US WTI crude oil lifted on forecasts that US crude oil inventories advanced last week. Iron ore rose 0.7% to USD136.80/t (CFR China).
The US ISM services index rose from 54.4 to 55.4 in October, ahead of forecasts of 54.0. The employment component rose from 52.7 to 56.2. The UK services sector gauge rose from 60.3 to 62.5 in October - the highest reading in over 16 years (May 1997). The European Commission predicts the 18-nation euro zone economy to grow by 1.1% in 2014 after contracting 0.4% this year.
Aluminium also fell after CHALCO, China’s largest aluminium producer, forecast China’s aluminium output may grow 11.6% to 24Mt in 2013, with capacity climbing to 32Mt by the end of 2013. The company also expects alumina output to lift 4.9% to 60Mt in 2013 and for the country’s bauxite import needs to increase.
From January to September, Norlisk Nickel’s nickel metal output fell 5.0% y/y to 212kt.
RasGas of Qatar, the world’s second largest LNG producer, has shut Train 7 at its Qatar LNG export terminal for 3-4 weeks of planned maintenance. Train 7 has an LNG capacity of 7.8Mtpa and the shutdown may support firmer spot LNG prices.
The total number of drill rigs deployed onshore in the US rose from 1,738 to 1,742 last week. Rigs deployed in oil plays rose from 1,357 to 1,376, while rigs deployed in gas plays fell from 376 to 360.
The four-month rally in iron ore stocks shows no sign of abating, with some miners hitting their highest share prices in more than a year this week.
Shares in BHP Billiton and Rio Tinto were on Monday fetching their highest prices since February and March respectively, while Fortescue Metals Group has not been this valuable since May 2012.
The strong rally in the sector has come after a four-month period that was supposed to be its weakest of 2013, yet saw the benchmark iron ore price refuse to slip below $US130 per tonne.
A further rise in the benchmark price to $US135 per tonne over the past 48 hours fuelled further buying on Tuesday, and pushed Fortescue shares to $5.53 for the first time in 18 months.
Fortescue shares have rallied so strongly since they were below $3 in late June that Deutsche analyst Paul Young downgraded the stock to a sell last week on the basis that it had become over-valued, particularly when compared with BHP and Rio.
But the analysts at Macquarie, who are traditionally bullish about iron ore, wrote on Monday that Fortescue looks ''considerably cheaper'' than BHP based on a price-to-equity ratio.
''Despite the 80 per cent rally over the past four months, we continue to see value in FMG,'' they wrote.
Base metal prices finished mostly lower on concerns for slower US economic growth in 3Q13 and weaker US employment data in October. Gold futures advanced as the US dollar weakened, while US WTI crude oil rose after US gasoline inventories fell more than expected last week. Iron ore rose by 0.2% to USD137.10/t (CFR China).
Nickel prices also declined after LME refined nickel stocks rose to a record high of 240kt yesterday, signalling a growing surplus of the metal. We expect refined nickel demand of ~1.7Mt this year.
US crude inventories rose by 1.58mmbbl to 385.4mmbbl in the week ending 1 November, just below forecasts of a 1.69mmbbl increase. In the same week, US oil production rose marginally to 7.858mb/d, while imports declined 3.2% to 7.224mb/d. The US refinery utilisation rate decreased from 87.3% to 86.8%, below expectations of 87.2%.
Emirates Aluminium (Emal) forecasts aluminium prices to increase to USc 90-95/lb next year as global demand lifts 6-7%. The company’s aluminium capacity is expected to increase from 810ktpa to 1.3Mtpa by 1H14.
The US crude oil industry, which includes representation by the American Petroleum Institute (API), is preparing to challenge US crude oil export restrictions by arguing the current rules may violate international trade laws under the World Trade Organisation.
The global composite purchasing managers’ index, a good guide to global economic growth, lifted from 53.6 to 55.5 in October.
From January to September, African Minerals produced 9.2Mt of iron ore from its Tonkolili mine in Sierra Leone and realised an average iron ore FOB price of USD71/t.
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