China – renewed growth expectations drive inventory restocking and new demand for metals
• A raft of positive data on Chinese economic and infrastructure growth has raised expectations for new growth in the region.
• China’s drive to stimulate domestic consumption and to continue its inland urbanisation program is creating specific demand for metals.
• A reacceleration of the development of infrastructure including suburban rail systems and routes connecting inland cities is good for steel and stainless steel demand.
• New loans into small and medium sized enterprises by state-controlled banks is seen driving local demand for goods and services.
• The improvement of construction methods should also raise production for steel alloys and their additives increasing demand for molybdenum, vanadium and ferrochrome. Demand for high grade steel is reported to be better than for low grade crude steel.
• Steel production rose 3% in the first six months of this year to 412mt as lower iron ore prices combined with renewed-stimulus.
• The rationalisation of steel production designed to close polluting furnaces and improve quality is causing more steel mills to upgrade to production of better grade steel and steel alloys.
• The easing of curbs on property transactions designed to hold back prices is also helping to create new demand.
• Shenyang, population of 8m, one of the top 10-15 cities, scrapped curbs on property earlier this year as smaller cities also eased regulations on purchases of second and more homes.
• A WSJ article recalls a comment from one Chinese steel producer: “Shen Wenrong, the owner of China’s largest privately-owned steel mill in Jiangsu province, famously noted at a public event in 2012 that the profit from a ton of steel is now less than the margins on a simple dish of stir fried meat. It was about 2,000 yuan per ton two decades ago and about 1,000 yuan a decade ago.”
• Chinese auto production and demand also continues to grow which is good for palladium for gasoline auto catalysts. In H1/14 production and sales of cars in China totalled 11.8m units and 11.7m units, up by 9.6% yoy and 8.4% yoy, respectively. Growth rates are slower than for last year but are counted of a larger base.
• Aluminium used in cars, trucks and trains in China continues to lag their usage growth in the US and Europe but this is expected to catch up as Chinese manufacturing upgrades its technology and sophistication..
• Aluminium costs around 4 times the price of most steel and Asian auto manufacturers are said to struggle to attract the same premiums as seen in the US and Europe for luxury brands of cars (Lexus, Infiniti), hence their preference for steel for now.
• Chinese producers are using more 300 series stainless steel which is more corrosion resistant and uses more nickel. New infrastructure construction and the fitting of new buildings should raise demand for this metal
Zimbabwe – government shuts down offices of mining commissioner on corruption probe into allocation of mining claims
• A heavy police presence was reported at the offices of the mining commissioner in Zimbabwe on Tuesday with police installed to prevent the movement of documents.
• The parent ministry has ordered an audit of the allocation of mining claims following allegations of corruption.
• The corruption probe is expected to ‘net a lot of officials’.
• Police are also said to be manning the Harare offices of the commissioner of mining according to The Zimbabwe Mail.
Dow Jones Industrials +0.45% at 17,138.20
Nikkei 225 -0.06% at 15,370.26
HK Hang Seng -0.09% at 23,493.00
US – Industrial production growth has slightly undershot expectations (+0.2%mom v 0.5% (revised from +0.6%) in May and 0.33%mom).
• The capacity utilization rate for total industry was unchanged at 79.1% in Jun, remaining 1.0pp below the long run average (1972-2013).
• The testimony of Janet Yellen to the House of Representatives Financial Services Committee yesterday was little changed from the speech delivered before the Senate Banking Committee a day earlier.
• Ms Yellen stressed the fragility of currenct economic growth in the US with weak labour market and stagnant wages justifying monetary easing to remain in place.
• All 12 Fed Reserve Districts reported growth in economic activity since the previous report, according to data collected before Jul/14. The pace of expansions described as “moderate” in 5 regions, including Mew York, Chicago, Minneapolis, Dallas and San Francisko, with a “modest” growth in the remaining Districts.
• Economic news due today:
o Thursday: Jun housing starts (+1.9%mom to 1.02m v -6.5%mom in May; the reading hit 1.07m in Apr, the highest in the post-crisis period), Jun building permits (+3.0%mom to 1.04mk v -5.1%mom; the gauge climbed to 1.06m in Apr, the highest this year and second highest post-crisis), Jul Philadelphia manufacturing index (16.0 v 17.8 in Jun)
Eurozone – Final inflation numbers for Jun month are due later this morning. Estimates suggest consumer prices climbed 0.5%yoy last month, unchanged from previously released flash reading.
Russia –The US and EU announced new round of sanctions placed on Russia amid few signs of de-escalation in the Ukrainian crisis.
• The US banned a number of Russian companies (, Novatek, Gazprombank and VEB) from accessing US equity and debt markets for new funding with a maturity beyond 90 days.
• At the same time, sanctions do not prohibit US companies and individuals from doing business with the Russian firms suggesting / partnership in Arctic, the US and Canada will not be affected. As well as the sale of ’s oil trading business to is likely to go through by the end of Sep.
• The US also froze the assets of 8 state-owned defence firms, including Kalashnikov concern.
• The EU decided to suspend new financing agreements with Russia involving the European Investment Banka and the EBRD.
• In addition, the leaders of the EU ruled to put asset freezes on companies that are “materially or financially” support the separatists in eastern Ukraine. Names have not been shortlisted yet, with the statement expected by the end of Jul.
• Russian equity indices, RTS and MICEX, are down 4% and 2.5%, respectively, this morning.
US$1.3532/eur vs 1.3543/eur yesterday. Yen 101.51/$ vs 101.71/$. SAr 10.671/$ vs 10.684/$. $1.711/gbp vs 1.713/gbp
Gold US$1,304/oz vs US$1,298/oz yesterday
• Gold imports by India climbed 65%yoy to US$3.12bn worth in Jun after the central bank allowed more banks and traders to purchase the precious metal overseas, according to Bloomberg.
• The Bank eased imports restrictions in the middle of Q1/14.
Platinum US$1,494/oz vs US$1,483/oz yesterday
Palladium US$883/oz vs US$869/oz yesterday
Silver US$20.80/oz vs US$20.74/oz yesterday
Copper US$7,059/t vs US$7,129/t yesterday
Aluminium US$1,978/t vs US$1,978/t yesterday
Nickel US$19,244/t vs US$19,377/t yesterday
• World nickel market slipped into a 400t deficit in May from a 3.3kt surplus recorded a month earlier, according to the INSG.
Zinc US$2,295/t vs US$2,315/t yesterday
Lead US$2,194/t vs US$2,214/t yesterday
Tin US$22,069/t vs US$22,120/t yesterday
Oil US$107.5/bbl vs US$106.5/bbl yesterday
Natural Gas US$4.095/mmbtu vs US$4.101/mmbtu yesterday
Thermal coal (1st year forward cfr ARA) US$77.4/t vs US$77.7/t yesterday
Seaborne hard coking coal index (quarterly) US$120.0/t vs US$120.0/t
Uranium US$28.50/t vs US$28.50/t
Iron ore 62% Fe spot (cfr Tianjin) US$98.0/t vs US$98.0/t
Tungsten APT European US$365.0/mtu vs US$375.0/mtu
() – Q2 Production Report in Line
• Iron ore production of 11.5 Mt up 2% on the same period last year.
• H1 2014 production up 5% to 21.6 Mt from the same period last year.
• At Kumba, Sishen was mined according to plan but with mine production down over the quarter.
• Kolomela mine produced 2.9 mt up 14% with good operational performance.
• Export sales increased by 1% to 10.3 Mt while domestic sales increased by 21% to 1.4 Mt.
• Copper up 6% to 194,400 t for the quarter and up 12% to 396,400 t for the first half.
• Good production from Los Bronces up 4% to 106,000t and Collahuasi up 42% to 53,600t with the sag mill shutdown impacting Q2 2013 performance.
• El Soldado’s production down 40% to 8,400 t due to the geological fault which has delayed development of the next phase.
• Nickel up 25% to 10,600 t for the quarter and up 35% to 19,800 t for H2 2014.
• Production at Barro Alto increased by 41% to 8,600t.
• Export Met coal up 10% to 4.8 Mt for the quarter and up 21% to 10.9 Mt for the H2 driven by productivity improvements at Dawson.
• Export thermal coal down 5% to 8.1 Mt for the quarter and up 4% for H2 at 16 Mt due to productivity improvements with South African mines.
• Platinum down 40% for Q2 at 358 koz and down 39% for H2 at 715 koz due to industrial action.
• Diamonds up 7% to 8.5m carats and up 12% to 16m carats for H1 2014.
• Recovery from the pit flooding at Venetia in 2013 drove volumes.
Conclusion: Overall production is as expected with some productivity improvements coming through and reversal of production issues in some operations in 2013. Anglo’s performance is being driven by a range of commodities unlike Rio and BHP making it one of the truly diversified plays in the sector.
* () – FY Q3 production report to end June
BUY – Target price 20p (June year end)
• IFL report their FY Q3 production report for ferrochrome production at their facilities in South Africa.
• The company report production of 57,462t up 6% through the third quarter with sales just behind at 52,172t as the company raised inventory levels.
• IFL continue to reduce borrowings with net debt now down to ZAR338m ($31.6m) from ZAR347m ($32.5m).
• Management have restarted the Lesedi underground mine which produces lump chrome ore at site.
• Ferrochrome price negotiations for the CY Q3 quarter continue with no benchmark price settlement seen as yet. South African producers argue that European demand and costs are rising while we believe Japanese consumers are holding out against a price increase. A small price increase is expected if the two sides compromise.
• IFL report that Chinese demand for chrome ore has raised South African chrome ore prices by 20% for chrome ore concentrate. Fortunately IFL has the Lesedi mine at site and is able to offset some of the price increase for third party ore.
• The team have suffered a couple of setbacks through the quarter as the platinum strike restricted delivery of UG2 ore and the co-generation plant is struggling to work to plan.
Conclusion: IFM made good progress earlier this year with costs and production growth. The team continue to work on the cost base and are well placed to take advantage of our expected rise in ferrochrome demand and prices later this year. News from China is positive and we expect the Chinese authorities to make further progress in closing polluting ferrochrome smelters within China.
* SP Angel acts as Joint Broker to IFM. The author recently visited IFL’s ferrochrome plant in South Africa.
() – Q2 Production and Update
• Q2 production came in at 1.2m wmt up 30% on the previous quarter.
• Sales are down 5% to 830 wmt from Q1 2014 and 18% from the same period last year.
• The average FOB price including hedges is up 7% to US$86/dmt.
• Plant performance is said to have been good with plant upgrades completed and production exceeding capacity of 5.4m wmt/a.
• An optimisation programme to redirect milled high grade material from spirals to a magnetic separation plant is expected to achieve above 100% production capacity.
• Plant capacity is expected to increase to 110 to 120% of nominal capacity to 5.9 to 6.5m wmt/a.
• Production guidance for the full year of 4.9 to 5.4m wmt/a.
• Sales were down due to lower exports as the transhipment platform underwent care and maintenance.
• Export volumes were also impacted by a dispute over transportable moisture limit (TML) of 10.9% which has now been resovled.
• Realised pricing improved based on hedging, reduced penalty fees and demurrage.
• Freight rates also improved to US$30/t – a 12% improvement.
• 0.7m dmt of Q2 sales were hedged at US$119/dmt CFR against an average spot price of US$104/dmt CFR.
• H1 2014 sales outside the hedge are expected to be impacted by the two month delay to pricing due to loading time.
• Q3 2014 should see an improvement on pricing to tons delivered to Cargill which will see a US$4-5/t improvement.
• Financing – a new US$17.5m facility has been arranged with Vitol as a partial prepayment on 500 kt of future unallocated exports.
• The company are also seeking a US$25m working capital facility with banks.
• A strategic investor is being sought to reduce debt and fund future capex.
Conclusion: Mine performance has improved but logistics continue to hit sales. Evidence of financial stress continues with a new facility from Vitol introducing liquidity and a working capital facility sought. Temporary debt financing is not the solution and the company is seeking a strategic investor who will be able to inject equity capital to reduce debt and fund capex.
() – Good Trading Update in Line
• Total gold production for the quarter of 414.3 koz up 25% on the previous quarter and up 4% on the same quarter last year.
• H1 production of 354.1 koz up 4% on the same period last year.
• Olimpiada continue to perform up 12% quarter on quarter, up 23% from the same time last year and up 15% for H1 at 354.1 koz.
• Improvements came through from higher recovery rates and processing volumes up 11%.
• Strip ratios have also gone up at the mine.
• Recovery rates increased to 76.1% from 73.4% at the same time last year with automation of the bio-oxidation facility progressing as planned.
• At Blagodatnoye, production was down 4% from Q2 2013 at 104 koz as a result of lower grades and processing volumes.
• Mines under development at Natalka continue as planned with guidance unchanged for mine start in 2015.
• 2 Mt were mined in Q2 for stockpiling giving 4 Mt in H2 2014.
• Sales of 410 koz was made with estimated revenues of US$527m, up 14% from Q2 2013 with H1 sales expected to US$974m down 2% from H2 2013.
• The weighted average selling price ws US$1,285/oz down 11% from Q2 2013 with the weighted average selling price down 14% for H2 2014 at US$1,296/oz against US$1,513/oz in H1 2013.
• The company covered the sale of 75 koz of put options at US$1,380/oz.
Conclusion: This is good performance from Polyus and supports its premium rating to the sector at a EV/EBITDA of 12.1x and PE of 22.7x.