Commodities Higher On Euro, End Of Quarter Buying

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By Rudi Filapek-Vandyck

The event had been telegraphed for weeks in advance, yet it is capturing global media headlines today as well as universal investor imagination: BHP Billiton ((BHP)) has scored an historical victory by securing shorter dated iron ore supply contracts with a “significant” number of customers in Asia.

This effectively means BHP has ended the annual contract pricing system in place since the seventies – 40 years of tradition – declared dead, just like that, in true Italian execution style.

Estimates suggest the new quarterly contract price for iron ore will be around 90-100% above last year's benchmark. Economists at National Australia Bank have quickly calculated the deal will improve Australia's terms of trade by around 16% through this year.

Meanwhile, upgrades to sector forecasts continue flowing into the market with analysts at BA-Merrill Lynch and Deutsche Bank both issuing sector updates (with increased forecasts) on Wednesday morning.

Note: Deutsche Bank remains positive on bulk commodities, neutral on precious metals and cautious on base metals. Analysts at BA-ML point out the revisions are huge for bulks, large for base metals (copper preferred) and about non-existent for precious metals producers.

Now that we mention precious metals, analysts at Standard Bank observed this morning that physical buying interest has continued showing itself every time gold threatened to break below US$1100/oz, but it just as quickly disappeared again as the price attempts to move further away.

Standard Bank remains thus of the view that gold is in essence not going anywhere for the time being, except maybe priced in euro. The view is also supported by the expectation the USD will soon start making a come-back on continued European debt concerns.

US based market trader, and publisher of the daily Gartman Letter, Dennis Gartman shares this euro view. Gartman notes the euro tends to make a come-back whenever the end of a period is near, be it the end of a calendar year, or the end of a fiscal year, or the end of a quarter.

Financial players squaring up their positions? Gartman certainly seems to think so. The implication here is to expect a come-back for the USD as we move deeper into April, and further away from the end of the March quarter.

Interestingly, Standard Bank analysts also report the spike higher in the copper price this week triggered Chinese selling orders. It just so happens to be that fresh buying by funds proved stronger than whatever the Chinese put up for sale. End of quarter squaring here too?

Over at the desk of technical market analysis at Barclays Capital in London, the analysts have observed the LME Index (LMEX) has now surged to a new high for 2010. This, the analysts report, should bode well for the second quarter.

On their analysis, the LMEX should surge higher in the quarter ahead.

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