In Commodity News 29/07/2015
Iron ore is a buyers’ market and prices will probably extend declines this half as low-cost supplies expand, according to Goldman Sachs Group Inc.
Recent weakness seen in Australian shipments is only a temporary lull on the way to further expansion, analyst Christian Lelong said in a note received on Tuesday. When operations among major Australian producers are back at full strength, and a new mine at Roy Hill opens in a couple of months, the downward pressure will probably resume, he said.
Iron ore sank to its lowest since at least 2009 this month as the largest producers including Rio Tinto Group and BHP Billiton Ltd. boosted output into an oversupplied market and commodities from oil to copper extended losses. While Goldman described Australian exports this month as sluggish, the bank said freight activity in Brazil was headed back to record levels. The countries are the two biggest shippers of the ore.
“Stock levels may start to grow modestly in the months ahead as supply growth accelerates once again but, in a buyers’ market, this is likely to come at the expense of further price declines,” Lelong said.
Ore with 62 percent content delivered to Qingdao rose 2.1 percent to $53.45 a dry metric ton on Tuesday, the highest in three weeks, according to data from Metal Bulletin Ltd. Prices retreated to $44.59 on July 8, the lowest level in at least six years, and have lost 25 percent this year.
While Goldman didn’t give a price estimate in the latest note, the bank said in a July 20 report that it expected prices to drop over the next four quarters to $44 by the April-to-June period of 2016 from $49 a metric ton through September.
Terminal Maintenance
“The prospects for iron ore seem rather bleak,” said Wu Zhili, an analyst at Shenhua Futures Co. in Shenzhen. “There’s more seaborne supply to come, especially from Australia. However, growth in supply won’t be as strong as last year because China’s demand for imported ore has begun to fall.”
Miners’ shares were mixed in Sydney on Tuesday as iron-ore futures advanced in China. Rio climbed 0.2 percent to A$51.28, while BHP lost 0.6 percent and Fortescue Metals Group Ltd. rose 2.3 percent. The three are Australia’s biggest producers.
“Since the start of the month, exports have been particularly disappointing in Australia, where scheduled maintenance at some terminals appears to be affecting shipments,” Lelong wrote. Still, that’s been partly offset by a strong rebound in Brazil, he said.
Exports from Australia will expand 10 percent next year to 824 million tons, according to the country’s Department of Industry and Science. Shipments will be lifted by operations at Roy Hill, the new mine in the ore-rich Pilbara that’s backed by billionaire Gina Rinehart and set to start exports this half.
Chinese stocks fell in volatile trading, extending the biggest one-day loss since 2007, as concern grew unprecedented government intervention will fail to shore up equities.
The Shanghai Composite Index dropped 1.7 percent to 3,663 at the close, after sinking as much as 5.1 percent and gaining 1 percent. About three stocks slid for each one that rose. Energy and technology shares slumped, while brokerages led an advance by financial companies. The gauge tumbled 8.5 percent on Monday amid concern a three-week rally sparked by unprecedented government intervention is unsustainable.
Chinese traders reduced leveraged stock bets on Monday by the most in two weeks as the stock plunge erased $613 billion in value. The securities regulator assured investors in a statement after the market closed the government hasn’t withdrawn support for equities.
“Confidence is very weak and the market will probably still seek a lower level of support,” said Wu Kan, a Shanghai-based fund manager at Dragon Life Insurance Co., which oversees about $3.3 billion. “If the market falls to or approaches the previous low, the government will take further rescue measures.”
The Hang Seng China Enterprises Index dropped 0.5 percent in Hong Kong, while the Hang Seng Index climbed 0.6 percent. The CSI 300 Index retreated 0.2 percent, paring a loss of as much as 5 percent. A measure of 30-day volatility in the Shanghai Composite jumped to its highest level since 1997 on Monday.
IMF Message
Trading volumes were 3.8 percent below the 30-day average on Tuesday. Data on Tuesday showed the number of new stock investors fell 26 percent to 391,500 in the week ended July 24, down from 1.5 million in the first week of June.
Monday’s retreat shattered the sense of calm that had fallen over mainland markets last week and raised questions over the viability of government efforts to prop up share prices as the economy slows. The International Monetary Fund has urged China to eventually unwind its support measures, according to a person familiar with the matter.
China Securities Finance Corp., a state-backed agency that provides margin financing and liquidity, hasn’t exited the stock market, China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement after the close of trading on Monday. The CSRC said Tuesday it’s investigating the previous day’s stocks selloff.
HOMS Concern
The Shanghai gauge had rebounded 16 percent from its July 8 low through Friday as officials went to extreme lengths to halt a rout that erased $4 trillion from the nation’s equities. Officials allowed more than 1,400 companies to halt trading, banned major shareholders from selling stakes and armed a state-run financing vehicle with more than $480 billion to support the market.
“I do think they will reduce intervention which is what the market is afraid of these days,” Steve Yang, strategist at UBS Group AG, said in phone interview in Shanghai on Monday. “The process will be very long. They do not need to rush to sell their positions in the short term.”
Gauges of energy, industrial and technology shares in the CSI 300 dropped more than 3 percent for the steepest losses among 10 industry groups. China Railway Group Ltd. slumped 8 percent for a three-day, 20 percent retreat.
PetroChina Co., long considered a favorite holding of state-linked rescue funds, declined 4.2 percent. The oil producer had been one of the biggest sources of support for the Shanghai Composite on big down days in late June and early July.
Bearish Technicals
Hundsun Technologies Inc., which runs a financial investment trading platform knowns as HOMS, plunged by the daily limit of 10 percent for a second day. The company denied online speculation that HOMS’s connection to brokerages will be halted after July 28 and investors will only be able to sell positions.
The outstanding balance of loans backed by share purchases fell by 21.4 billion yuan ($3.4 billion) to 919.4 billion yuan on the Shanghai exchange on Monday, according to bourse data.
Margin financing from official and unofficial channels may end 2015 at less than half its June record high as deleveraging continues, according to the median estimate of nine analysts surveyed by Bloomberg.
Chinese stocks will decline by an additional 14 percent over the next three weeks as the market demonstrates a trading pattern that mimics that of the U.S. crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite in 2013.
“The die has been cast,” DeMark, 68, the founder of DeMark Analytics in Scottsdale, Arizona, who has spent more than 40 years developing indicators to identify market turning points, said by phone. “You just cannot manipulate the market. Fundamentals dictate markets.”
