Tag Archives: Base Metals and Minerals

article 3 months old

The Power Of Lithium

This story was first published for subscribers on May 16 and is now open for general readership. Readers are also referred to a subsequent update, Supply Response In Lithium Hots Up.
 

- Lithium price on the move again
- Battery demand forecast to grow exponentially
- Supply response to be constrained
- Australian stocks at the forefront
 

By Greg Peel

Foreword

“The need for a fully electric yet practical car has clearly become an urgent one ever since the oil price hit US$147/bbl and the world began to panic about its carbon footprint. The fact that oil is now back at US$45/bbl is not fooling anyone.”

One might be forgiven for assuming the above quote is only a couple of weeks old. In fact, it is from a feature story I published in FNArena in March 2009. The GFC-inspired fall in the oil price from all-time highs took us down to the mid-thirties before rebounding to the mid-forties and continuing upward again to around US$120/bbl. The US shale oil explosion has since repeated the pattern, at least to the extent the WTI price has returned to US$45/bbl. If we are ever to see US$100/bbl again, it won’t be for a very long time.

The feature in question was Lithium Reaches For The Stars and was inspired by a meeting with the then managing director of lithium early-mover Galaxy Resources (hence the title). In researching this new FNArena feature on lithium, my first port of call was this previous feature. Has anything changed since 2009?

Well for starters, 2009 was a year in which anything on the periodic table that was not a household name, like carbon or copper for example, surged exponentially in price in a speculative bubble. Rare earth minerals led the charge, but while not the least bit rare, lithium was caught in the same frenzy. The thesis behind the rare earths and lithium was the same – new technology, in the form of mobile devices, electricity generation and storage, electric vehicles (magnets and batteries) and so forth, was set to change the world.

The bubble burst late in 2009, just like the speculative uranium bubble had burst two years earlier. In March of 2009, Galaxy Resources was trading at around 35c per share. In September that year it hit $2.19. By 2015 it was at 25c.

Galaxy Resources is on the move again, given new developments in what was already new technology back in 2009. In 2009, many in the industry did not believe the fully electric car would ever be viable. The hybrid Prius, they said, was just a fad that would fade. Seven years on, Tesla has received over 400,000 pre-orders for its new, fully electric and affordably priced Model 3, due off the production line in 2018.

In 2009, it was assumed it would be electric vehicles that would drive lithium battery demand, alongside mobile devices and anything that is easier to use without a power cord, such as power tools. In 2016 it is still assumed electric vehicles will be the major driver of battery demand in the near-term, but what was not foreseen in 2009 was that by 2016, households and commercial properties would be converting to battery storage power systems, either supplemented by on-grid connection or completely off-grid.

It’s early days, but economies of scale will continue to bring such a “green” shift into the reach of more average households and businesses which at this stage have shied away from the up-front cost, despite longer term cost savings. Australia’s downstream electricity suppliers know this, which is why the likes of AGL Energy and Origin Energy are rapidly diverting their resources towards alternative power development and becoming on-sellers of battery storage units for the home and business.

What has also changed between 2009 and now is the global demand-supply outlook for lithium production. This new article will concentrate on the latest research, and highlight new Australian players in the lithium space. However I encourage readers to return to my 2009 article for a comprehensive overview of lithium – its history and potential future – as a prologue to how we got to where we are today with regard the metal. The forecasts and projections therein can be considered outdated, nevertheless, but not misguided.

The Outlook Today

While the electric vehicle (EV) had its detractors back in 2009, many in the market saw the EV as the future, as fossil-fuelled vehicles waned in popularity. It was not an oil price issue given, as noted above, the WTI price in March 2009 was US$45/bbl and is basically that in May 2016. It was “green” theme.

As is usually the case, the market got ahead of itself. Development of viable EVs took longer than anticipated, particularly affordable EVs, and in the meantime, global emission reduction negotiations among governments ended with the usual agreements to plan to think about a plan, and nothing concrete.

But despite a lack of any global cooperation, nations took it upon themselves to establish emission reduction targets. While Europe has always led the green charge, the US has now established meaningful policies and China is leading the alternative energy drive. Corporations across the globe, including in Australia, have not waited for government action. Households across the globe, including in Australia, have taken it upon themselves to “go green”, despite the cost, because they want to.

While Tesla is still trying to iron out the gremlins in its EV offerings, the fact over 400,000 punters have pre-ordered a US$30,000 EV without ever seeing one in the flesh is testament to the green-shift among the world’s population.

In 2009, notes Paragon Funds Management, lithium demand was projected to reach 200kpta by 2013. This did not eventuate. But demand has now hit 200ktpa, and is growing at double-digit rates. Having bubbled and burst, lithium prices are now bubbling again, but this time the demand-side of the equation actually exists, whereas pre-2009 it was all about speculation. Today inventories are so low, Paragon reports, all the major global lithium producers have confirmed they are fully sold out.

Undersupplied lithium markets should persist over the medium term, Paragon suggests, given the inability for any significant supply-side response globally and the usual resource project development challenges.

At the centre of surging demand lies the lithium-ion battery. While lithium batteries of the scale required to power your iPhone or cordless drill have long been inexpensive enough to render them mass-market, the cost of batteries of the scale required to form the power matrix for an EV or to store solar power sufficient to satisfy an average household’s needs were, back in 2009, simply prohibitive. The cost of an energy cell in 2010, notes Deutsche Bank, equated to US$9000 per kilowatt hour. That cost today is US$225/kWh. Deutsche believes the cost can fall to US$150/kWh by 2020 as global battery manufacturing capacity ramps up.

While household/business battery storage units are the next big thing in the world of green, the EV remains the primary driver of battery demand for now. Tesla has taken centre stage on this front, despite the fact established marques from Europe to Japan and the US (Chevrolet Volt, for example) have also been working feverishly on their own EV models. Most importantly, Deutsche Bank notes, the largest catalyst for mass-market EV take-up is China, where government subsidies are now in place for both passenger and commercial EVs.

Hybrid EVs (such as the Toyota Prius) currently dominate global EV sales, with fully electric EVs reaching only 0.6% of all global auto sales in 2015. Deutsche is forecasting EV sales sales to grow to over 16 million vehicles by 2025, of which 3 million will be fully-electric, meaning six times the 2015 number.

A key buzzword in the 2010s has been “disruptive”, referring to anything that challenges the status quo in a given industry. Amazon has proven how online retail has disrupted traditional bricks and mortar stores. Netflix has disrupted traditional “by appointment” television. Uber has disrupted the global taxi industry. And lithium-ion batteries, Morgan Stanley believes, are set to disrupt traditional sources of energy.

New markets are being created with new value chains that could significantly affect industry fundamentals, Morgan Stanley suggests. These new energy materials include raw materials to manufacture rechargeable batteries but also those needed for the infrastructure required to support greater take-up of EVs and energy storage.

Depending on type, rechargeable batteries contain not just lithium, but a number of mined materials including graphite, cobalt, nickel, zinc, manganese, aluminium and phosphorus. Of this group, only lithium, graphite and cobalt are used in any meaningful proportion, Morgan Stanley notes. Of these three, cobalt offers little in the way of direct exposure in Australia for investors. Not so lithium and graphite.

Taking another step down the path, Morgan Stanley points out copper will also be important in this new energy world, providing the conductivity in charging poles and stations.

The Demand Side

Global lithium demand was 184kt in 2015, with battery demand increasing by 45% year on year and accounting for 40% of global lithium demand. Deutsche Bank expects global lithium demand to increase to 534kt by 2025, with batteries accounting for 70%.

Deutsche is forecasting EV battery consumption to grow at a 23% compound annual rate over the next ten years.

Starting from a lower base, battery demand for energy storage will grow by a 45% compound annual rate, Deutsche believes. While lithium is not the only metal capable of storing energy, technological development, superior performance and rapidly falling costs should ensure lithium batteries will remain the battery of choice.

Paragon Funds Management cites several key positive industry developments in 2016 alone.

There are the aforementioned Tesla orders. Currently there are commitments around the globe to build twelve lithium battery mega-factories. Warren Buffet’s BYD Co, China’s largest electric car and bus manufacturer, has announced plans to diversify upstream to secure lithium supply. And the Mt Marion and Mt Catlin lithium projects in Australia (more on these later) have forward-sold or entered into binding offtake agreements for most to all of medium term production, at above-market pricing.

Lithium prices have continued to rise in 2016, Paragon notes, up over 25% to US$7500/t, which suggests the funds manager’s medium term forecast price of US$9000/t may need to be revised. Domestic spot prices in China have risen by over 70%.

The lithium market will remain in deficit in 2016, Deutsche Bank forecasts, suggesting these elevated prices can hold to the end of the year. It is this market backdrop that is now incentivising new supply projects.

The Supply Side

Global lithium output in 2015 was 171kt, a fraction of global lithium reserves of 102mt, Deutsche notes. Most major commodities have 15-100 years of global reserves based on 2015 supply, but lithium reserves are 594 times 2015 output.

This would tend to suggest it’s only a matter of time before the bottom falls out of the lithium market. Effectively unlimited supply in the face of rapidly growing demand should encourage a rush around the globe to commission lithium production projects until ultimately supply growth exceeds demand growth. But it’s not that simple.

Paragon concedes the strong rise in the lithium price will incentivise new supply, with end-users and offtakers themselves likely to pursue greenfield projects. The potential for oversupply is a key risk to Paragon’s positive view on lithium but this is dependent on likely new projects coming online on time and at design capacity.

History suggests, says Paragon, this is highly unlikely.

Deutsche Bank is forecasting the lithium supply market to triple over the next ten years. Even then, there would still be 185 years of global reserves available.

The current lithium supply market is dominated by four major producers – Albemarle (US), SQM (Chile), FMC (US) and Sichuan Tianqi (China) – which accounted for 83% of global supply in 2015. The rise of the lithium battery in the early noughties and subsequent surge in lithium prices in the late noughties resulted in a wave of investment in mine expansions for South American-based brine assets and increased conversion capacity in China for hard-rock lithium feedstocks, Deutsche Bank notes.

[A full explanation of the differences and pros and cons of lithium contained in brine and lithium contained in rock is included in the prior FNArena feature, linked at the beginning of this article. Suffice to say, brine lithium requires a greater capital intensity to bring to production but provides a low operating cost thereafter, whereas hard-rock lithium production is cheaper to start up but operational costs are much higher.]

Then along came the GFC, and the lithium bubble burst. By 2013 lithium prices were severely depressed. But by mid-2015, prices began to move again as the much hailed lithium battery began to become more science than science fiction.

Australian Producers

Last week Deutsche Bank upgraded Orocobre ((ORE)) to Buy. The company owns 66.5% of the Olaroz brine project in Argentina with joint venture partner Toyota Tsusho. Having suffered early commissioning issues, the project has now reached 60% of nameplate production capacity and is expecting to reach full capacity by September.

With cash costs expected to be below US$2500/t, Olaroz should be strongly cash flow positive at a full run-rate. The project recently passed the cash breakeven mark. The next step is for Orocobre to de-risk the Olaroz phase II expansion, which will take production from 17.5ktpa to 30-40ktpa.

Since late last year, Orocobre’s share price has more than doubled, almost reaching Deutsche’s upgraded price target of $3.90. Stockbroker Morgans (as opposed to Morgan Stanley) upgraded Orocobre to Buy (Add) last month, and set a target of $3.48. This may soon be revised.

Mineral Resources ((MIN)) produces iron ore, which is why its share price was hammered in 2015 and into 2016, and why the stock for some time was one of the most shorted on the ASX. Mineral Resources shares have also now doubled from their February lows, and the shorters have been sent packing.

One reason is that Mineral Resources is primarily a mineral processor, with a bit of iron ore mining on the side. As junior iron ore miners have suffered major cash flow issues of late, Mineral Resources’ cash flow has been more reliable thanks to processing revenues. More importantly, the company will earn-in to a 43% stake in the Mt Marion lithium joint venture, located near Kalgoorlie in Western Australia.

Mt Marion is under construction, with first production expected sometime later this year. The initial target production rate is 27ktpa. Mineral Resources is building and will operate Mt Marion on behalf of joint venture partner Neometals ((NMT)) and joint venture and offtake partner, China’s Ganfeng Lithium.

Deutsche also upgraded Mineral Resources to Buy last week, joining Morgan Stanley and Ord Minnett with equivalent ratings. The average price target between the three is currently $8.77. Morgan Stanley has this week reiterated its Overweight rating.

This is not because the spot lithium carbonate price has been surging. Morgan Stanley notes the more relevant benchmark lithium concentrate price seems to be more stable. The broker has reiterated Overweight, and lifted its target price to $8.90 from a previous $6.50, because the Mt Marion project is de-risking.

Shares in General Mining ((GMM)) have rallied from 10c last October to over 60c today. That’s because General Mining will earn in to 50% of the Mt Caitlin lithium project near Ravensthorpe in Western Australia, otherwise owned by joint venture partner, the aforementioned Galaxy Resources ((GXY)).

The joint venture has now pre-sold 2016 and 2017 Mt Caitlin production to offtake partner Mitsubishi, with a 2016 price agreed at US$6000/t. This is a major de-risking event, suggests Paragon Funds Management. Thus while the shares of both General Mining and Galaxy Resources have re-rated significantly of late, the fund manager continues to hold both ahead of what is now a likely expansion to the Mt Caitlin project.

Galaxy Resources also owns 100% of the Sal de Vida brine project in Argentina, which Paragon describes as the “best and most advanced undeveloped lithium brine asset globally”. Despite Galaxy’s recent share price surge, a heavy discount for Sal de Vida is implicit in valuation, Paragon’s analysis suggests. A bankable feasibility study for the project is due shortly ahead of securing funding, both of which should prove material catalysts for the stock, the fund manager believes.

Paragon has nevertheless now taken profits on its holding of Pilbara Minerals ((PLS)). While Mt Marion and Mt Caitlin are ramping up production, Pilbara has recently raised further capital in order to advance its Pilgangoora lithium-tantalum project in Western Australia. The stock has enjoyed a similar re-rating to Australia’s other lithium-exposed names, but has reached Paragon’s base case valuation and is a long way from de-risking.


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article 3 months old

The Overnight Report: Consolidation

By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P was flat at 2090 and the Nasdaq rose 0.1%.

Resistance

After another strong session on Wall Street, the ASX200 shot up 30 points from the bell yesterday, hit a brick wall at 5400, and promptly tumbled just as quickly to be down on the day. After dusting itself off, the index again staged a rally before running into the weak capex numbers.

Again we were in the negative. But ultimately the market grafted its way back to a close of 5388, once again eyeing off the 5400 barrier.

It was a mixed bag among the sectors yesterday. Energy (2.0%) and materials (1.7%) again led the charge to the upside with the banks providing only limited support, while the selling continued in Wesfarmers ((WES)) following prior announced impairments. Hence consumer staples fell 2.1%. Telcos and utilities also came under some pressure.

The headlines have all been typically sensationalist over a weaker than expected March quarter capex result but in fact the numbers weren’t as bad as they looked, if one considers that there are two sets of numbers. There is the “what was” of actual capital expenditure over the period and there is the “what will be” of capex intentions for the next financial year.

“What was” fell a larger than expected 5.2% and will have economists trimming their March quarter GDP forecasts. Mining fell 12% and non-mining rose 0.4%. We can take some solace in the fact the “mining” number must eventually stop falling, although we still have to get past the ramp-up (and subsequent end to capex) of the big LNG projects. Meanwhile, non-mining is just not gaining enough traction to make the difference.

If we look at the “what will be”, the second estimate of FY17 capex intentions came in at a better than expected $89.2bn, up 6.3% higher than the first estimate a quarter ago. Of that $89.2bn, mining accounts for $36.0bn and non-mining $53.2bn. That would seem a step in the right direction.

While the RBA will be keen to have learned just how the Australian economy really did fare in the March quarter, it is capex intentions that inform monetary policy going forward.

Meanwhile, the market still gives the impression it really wants to break through 5400. Perhaps once the profit-taking is exhausted, it might. But today is a Friday, there is no support from Wall Street for another sortie, and this weekend is also a long one in the US, providing cause for traders to square up.

Happy Birthday

The Dow turned 120 years old last night.

While the Dow Jones company was keen for a celebration, Wall Street had no plans to turn on an exciting session. After two solid days of rallying, the Dow took a breather. While going nowhere does not provide much opportunity to make money, traders were nevertheless pleased to see the indices hold their ground in consolidation rather than sharply fall back again, as is often the case.

In economic news, US durable goods orders rose 3.4% in April but stripping out the lumpy transport component left a more modest 0.4% gain. The core capital goods component, which is seen as a proxy for business investment, fell 0.8%, and has fallen in five of the past six months.

So not a particularly rosy picture there. By contrast, the US housing market continues to surge along, with pending home sales jumping in April to their highest level since February 2006. The pending home sales numbers match very strong new and existing home sales numbers released earlier in the week, as well as an ongoing rise in house prices.

The other important driver of Wall Street at present – oil – saw an initial rally last night to push WTI over the 50 mark, but 50 is to oil what 5400 is to the ASX200 at the moment, and this morning oil prices are down slightly from the day before.

It is a full session in US equity markets tonight but the tumbleweeds will be rolling through the NYSE after lunch as Wall Street is evacuated for the Memorial Day long weekend – the unofficial start of summer.

Commodities

West Texas crude is down US34c at US$49.40/bbl and Brent is down US43c at US$49.47/bbl. I think it is now fair to say WTI has regained its place as the global oil benchmark from Brent, now that the spread is negligible and US oil production is the swing factor in global supply. To that end, Brent prices will continue to appear on the FNArena website but I’ll only mention it here from now on if something strange happens.

When WTI breached 50 last night, LME traders decided enough selling had been seen and piled into base metals, sparking a short-covering scramble. When oil retreated again, so did metal prices, but while copper and nickel only managed gains of around 0.5%, aluminium rose 1%, zinc 2.5% and lead 3%.

Metal prices were also supported by another dip for the US dollar index, down 0.3% to 95.15.

Speaking of magic 50 marks, iron ore fell US10c to US$49.90/t.

Despite the weaker greenback, gold is down US$4.50 at US$1219.50/oz and because of the weaker greenback, the Aussie is up 0.3% at US$0.7223.

Today

The SPI Overnight closed up 5 points.

The US March quarter GDP result will be revised tonight and Fed chair Janet Yellen will speak, potentially sparking some volatility that might otherwise be absent on a pre-long weekend Friday.

Locally, Fisher & Paykel Healthcare ((FPH)) has released its earnings report this morning.

Rudi has returned from his up-close evening with FNArena subscribers in good spirits and he will Skype-link with Sky Business at around 11.05am this morning to discuss broker calls.
 

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(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

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article 3 months old

Supply Response In Lithium Heats Up

-Key is identifying quality projects
-Two new Oz sources in 18 months
-Surplus by 2019?
 

By Eva Brocklehurst

Major producers of lithium are ratcheting up production from brine-based operations in South America, as growth in lithium-ion battery usage, primarily in the electric vehicle and grid storage markets, excites interest in the commodity.

FMC Corp has become the third major producer to flag an increase, following Albermarle and SQM, and Deutsche Bank observes the company intends to increase output of battery-grade lithium hydroxide to at least 30,000 tonnes per annum by 2019, from 10,000tpa currently. The broker has recently highlighted FMC's strong downstream business and the quality of its Argentine project. The company's supply target represents an additional 13% to the broker's forecasts.

The news supports Deutsche Bank's contention that the key for investors in the lithium space is identifying the companies which control the high quality projects and have access to capital and strong operating margins, with potential to grow volumes. On this theme, Deutsche Bank highlights Albermarle, Orocobre ((ORE)) and Mineral Resources ((MIN)) as top picks for upstream lithium exposure.

Canaccord Genuity forecasts the market to grow 81% by 2020 and 259% by 2025. The broker expects the demand for these batteries in the electric car market will be the key driver of demand for the next decade, accounting for 38% of all demand by 2025, versus just 6% in 2015.

A supply response is expected, but the longer-term demand profile suggests prices will go higher. The broker estimates global supply at 176,000 tonnes of lithium carbonate equivalent (LCE) in 2015, with production dominated by six operations and four major companies including Albermarle, SQM, FMC Corp and Sichuan Tianqi.

In determining the supply side response, the broker analyses over 60 projects for the product, with 19 at an advanced stage and offering potential for additional production in the next 5-6 years. Included in the 19, the broker expects only two new sources globally within the next 18 months - Mt Cattlin and Mt Marion – both Australian projects.

Mt Cattlin joint venture partners include Galaxy Resources ((GXY)) and General Mining Corp ((GMM)) while Mt Marion partners include Ganfeng Lithium, Mineral Resources and Neometals ((NMT)).

To meet base case forecasts the broker estimates an additional 312,000 tonnes per annum in new production will be required by 2025. Based on its modelling, Canaccord Genuity forecasts lithium carbonate prices to rise to US$10,500/t in 2025, from US$6,000/t in 2015.

After crunching these numbers the broker amends its target price for Mt Cattlin partners Galaxy Resources, up to 60c from 50c, and General Mining, down to 85c from 95c. Both stocks are rated Speculative Buy.

Beyond the next two years the broker expects additional supply from new hard rock projects such as Pilgangoora, involving Altura Mining ((AJM)) and Pilbara Minerals ((PLS)), as well as brownfield expansions from brine operations, including Orocobre's Olaroz stage 2 in Argentina.

Based on the likelihood of these new projects being brought into production and base case demand assumptions the broker forecasts the lithium market to be in surplus in 2018 and 2019 before returning to deficit in 2023.

Citi has upgraded is lithium carbonate price forecasts by 17% for 2016 and 9.0% for 2017 to US$7,625/t and US$7,375/t respectively. This broker remains cautious about 2017 as new production enters the market but does not, as yet, anticipate a significant correction in the price.

Deutsche Bank also concludes from the rapid uptake of electric vehicles in China that demand for LCE outstripped supply in 2015, leading to a deficit, particularly in China. The broker expects global demand will grow at a compound 18% over the next three years, although supply is expected to respond. If FMC's planned production increases come to fruition the market could be in surplus by 2019, the broker contends.

See also, The Power Of Lithium on May 16, 2016.
 

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article 3 months old

The Overnight Report: Encore

By Greg Peel

The Dow closed up 145 points or 0.8% while the S&P rose 0.7% to 2090 and the Nasdaq gained 0.7%.

Green on Screen

After two wavering and nervous-looking sessions for the ASX200 on Monday and Tuesday, yesterday saw a return to the type of buying we saw last Friday – index wide. Thanks to a sudden return to exuberance in Europe and on Wall Street, Australia joined in the risk-on flurry.

As oil prices push up towards the 50 mark, energy led the charge with a 2.7% gain. At the other end of the scale, the defensives of utilities and consumer staples dragged the chain somewhat, only managing gains of around half a percent. Every other sector posted uniform gains of around 1.5%, and thus so did the ASX200 by the close.

There was a slight fade at the end – the index almost raised its bat to the crowd around lunchtime before settling up 76 – but otherwise yesterday’s “rally” mimicked that on Wall Street in being a step-jump from the opening bell and thus not much of a “rally” per se.

However while Wall Street traders were suggesting on Tuesday night it was all about a short squeeze and little else, Australia’s level of short positions are as low as they’ve been for a long time. And shorts in the Big Caps are minimal. Thus we can’t call yesterday a short squeeze downunder. We may, nevertheless, call it jumping on the bandwagon.

The volume of construction work in Australia declined by 2.6% in the March quarter, yesterday’s data revealed – worse than the 1.5% decline forecast. Engineering construction fell 4.2% to be down 13.7% year on year, balanced by a rise in residential construction of 1.5%, up 5.7% year on year. The housing boom is not finding the support elsewhere to overcome rapidly declining resource sector investment. The Australian economy is struggling in its transition.

Not that anyone cared yesterday. And besides, Glenn’s got our backs.

The construction data feed into today’s more influential capex numbers. Could they take the wind out of the sails?

Same Again

On Tuesday night global markets were encouraged by easing Brexit fears. We recall that the tag “Brexit” had its origins in something we all used to worry sick about in previous years – a possible “Grexit”.

Last night eurozone finance ministers agreed to release E10.3bn of bail-out funds to the still-struggling member, despite Germany’s opposition, two days after the Greek parliament voted to enact a further round of spending cuts and tax increases. The ministers also agreed to offer Greece further relief in 2018 if required.

While not in the class of a Brexit in terms of possible global turmoil, staving off renewed Grexit fears is still a mild positive for the risk-on players. And we won’t have to all go on and on about it again.

Otherwise another day of rallying on Wall Street was simply a follow-on from Tuesday. And while volumes were a little better last night than the night before, they still weren’t the stuff of buyer conviction. Again traders declared the rally to be driven by little more than short-covering, and advised their clients to sell into to it.

Last night’s monthly trade data released in the US showed an increase in both exports and imports, further fuelling a sudden belief the US economy is actually doing pretty well. Positive data continue to feed into June rate hike expectations, and thus into strength in the US financial sector. Tonight all eyes will be on durable goods. Another gain for oil prices, almost to the 50 mark, also helped drive a second session of market gains.

On Monday night, Wall Street barely moved, uncertain as to what might transpire with the UK and with Fed policy. Since then, the Dow is up 358 points.

Commodities

West Texas crude is up US63c at US$49.74/bbl and Brent is up US77c at US$49.90/bbl.

Aside from playing off supply numbers, oil is looking at stronger US data as a positive sign. The trade-off is a stronger US dollar a Fed rate rise implies. Base metal markets should also see stronger data as a positive, but are more fearful of the greenback at present and unsure over demand-supply, given China is yet to show any real rebound.

The US dollar index has slipped 0.2% to 95.40 but aluminium, lead and nickel are down 0.5-1.5%. Copper is up a percent.

Iron ore fell US20c to US$50.00/t.

Stability in the greenback means gold has also stabilised at US$1224.00/oz.

The Aussie is 0.2% higher at US$0.7199.

Today

The SPI Overnight closed up 34 points or 0.6%.

If accurate, that would take the ASX200 over the 5400 mark. The question is as to whether we will see profit-takers come in at that level, or whether a breach will bring in fresh buying.

As noted, the US sees durable goods data tonight but before that, the local release of March quarter private capex and capex intentions numbers today will be very closely watched by the RBA.

Aristocrat Leisure ((ALL)) will post its earnings result today.

Rudi will make his weekly appearance on Sky Business, 12.30-2.30pm and tonight he shall entertain a small group of subscribers who signed up for the Sydney "An Evening With Rudi" event.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Oh Won’t You Stay

By Greg Peel

The Dow closed up 213 points or 1.2% while the S&P gained 1.4% to 20176 and the Nasdaq jumped 2.0%.

Reprieve

Had I been writing this Report yesterday evening I would have suggested the local market looked very vulnerable. Last Friday we saw a market looking very much like it wanted to go up, supported by recent developments in monetary policy. On Monday we plunged from the open but immediately the technical buyers stepped in.

But that rebound faded in the afternoon. Yesterday we saw another attempt to recover from early sogginess before a sharp fall towards the closing bell. That drop ensured a close under 5300, and that is technically weak. Markets that want to go up but can’t find support tend to swiftly become markets that go down.

Had the Dow been down two hundred points this morning it would have been Goodnight Irene. But the Dow is up two hundred points so the local market is in for a reprieve. The futures are up 75 points this morning.

Yesterday saw only healthcare and utilities hold up against a tide of weakness elsewhere. Energy saw the biggest fall of 1.3% on a lower oil price, but oil is strong this morning. Materials responded to a weaker iron ore price and that was weak again overnight, albeit the two big miners rallied in London.

The telcos finally caved with a 1.0% fall and it's surprising that hadn’t happened earlier, given Telstra’s outage woes.

All of the above will prove academic today.

More enduring is RBA governor Glenn Stevens’ suggestion in a Q&A yesterday that inflation in Australia is too low, and that RBA still wants to see it back above 2%. This implies another rate cut is on the cards, and as such the index did jump higher, briefly, at lunchtime yesterday, before selling again overwhelmed.

The Aussie also dutifully dropped on Stevens’ comments, despite the fact the market has already baked in another rate cut and that’s what had us down at 72 in the first place. Strength in the greenback overnight had the Aussie falling as low as 71.4 before it stabilised, down 0.6% over 24 hours at US$0.7184.

Risk On

There’s been a lot of concern of late about the upcoming Brexit vote, much Chicken Little commentary and speculation the Fed will remain on hold until after the referendum just in case the world goes to hell in a handcart. Polling, up to now, has favoured the “stay” vote, but inconclusively so.

The latest poll released last night has inspired confidence in there being no Brexit. It showed “stay” at 55% and “go” at 42% -- the widest margin to date. Importantly, the poll only recorded the intentions of those who definitely plan to vote, and for the first time the “stay” vote outweighed the “go” vote in the over-65 cohort.

The fear has been that the “goers” would be more likely to come out to vote than the “stayers”, and that there would be a greater nationalistic fervour among older Britons. Last night’s poll eased those fears.

And subsequently eased market fears, both in London and across the Channel. The FTSE jumped 1.4%, the German DAX 2.2% and the French CAC 2.5%.

That sense of relief then flowed across the Pond. But if that wasn’t enough, data released before the opening bell on Wall Street revealed US new home sales jumped 16.6% in April, the biggest monthly jump in 24 years.

(Keep an eye on those Aussie stocks with a finger in the US building materials pie today.)

For US home building stocks, it was off to the races. And for the rest of the market, the result was the same. But hang on…surely the strong home sales numbers give the Fed more reason to hike in June, and an easing of Brexit fears removes that particular barrier? Shouldn’t Wall Street crumble on rate hike fears?

Many believe this will likely still occur in the short term, were the Fed to hike next month. But in the wider scheme of things, such a solid new homes sales result suggests the US economy is actually at lot stronger than many had assumed – particularly those who up to now could see no economic reason why the Fed should feel the need to hike. And on a global scale, if there is to be no Brexit then that takes out a major concern that would otherwise have investors hiding on the sidelines.

Two sectors stood out last night – banks and tech. Rate hikes are good for banks. Tech represents the epitome of the “risk on” trade, being for the most part very speculative. But “tech” includes names like Apple, and when the biggest stock in the market rallies hard, there’s a big impact on the indices.

Yet it wasn’t really a “rally”, per se. The Dow shot up 200 points from the opening bell and stayed there all day. Volumes were not particularly heavy. It is thus most likely, commentators agreed, that last night was more about short-covering than anything else.

Commodities

It also didn’t hurt that West Texas is up US$1.00 or 2% after a couple of soggy sessions, to US$49.11/bbl, and Brent is up US76c at US$49.13/bbl – as good as parity. The strong home sales data feeds back to expectations of stronger oil demand.

Base metal prices could fare no better than mixed in London nevertheless. Copper and nickel are up around half a percent and aluminium, lead and zinc are down around half a percent.

Iron ore fell another US$2.50 to US$50.20/t.

The US dollar index is up 0.4% to 95.59 on rate hike expectations, thus gold is down US$21.30 at US$1226.90/oz.

Today

The SPI Overnight closed up 75 points or 1.4%.

Locally we’ll welcome the numbers for March quarter construction work done today, which feed into tomorrow’s capex data. Otherwise, it’s quite a busy day on the local stock front.

Programmed Maintenance ((PRG)) will release its earnings result. Investor days will be held by all of Boral ((BLD)), Suncorp ((SUN)) and WorleyParsons ((WOR)), while Perpetural ((PPT)) will provide an update on its investment division.

Adelaide Brighton ((ABC)) and G8 Education ((GEM)) are among a handful of companies hosting AGMs today.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Waiting Game

By Greg Peel

The Dow closed down 8 points while the S&P lost 0.2% to 2048 and the Nasdaq fell 0.1%.

Contrast

What a difference a weekend makes. On Friday local investors steadily pushed the ASX200 up 0.5% to the close in a mostly straight line, with all sectors faring relatively equally. The session smacked of index buying. Yesterday, in stark contrast, was a rock’n’roll affair.

The index opened slightly higher before promptly falling 54 points to late morning. It then rallied to be back in the positive by 2pm before falling away again to the close, down 32 points. For the most part, the sector moves up on Friday were all largely reversed.

The exceptions were telcos, which held their ground, and energy, which dropped 2.0%. Analysts are quite happy with Oil Search’s ((OSH)) complex bid for InterOil but investors sold the stock down 3%. Individual company issues which were absent on Friday were back in force yesterday. Beyond Oil Search, we had a profit warning from Flight Centre ((FLT)), the fourth most shorted stock on the market, which fell 9%, and a profit upgrade from BlueScope Steel ((BSL)), which jumped 7%.

On Friday the focus appeared to be on the potential for ever lower rates from the RBA, despite a reasonable economy, and the benefits that might bring. Yesterday investors appeared concerned about commodity prices once again, as oil fails to push through 50 and iron ore futures took a tumble yesterday afternoon. Spot iron ore fell 5% overnight.

With macro fundamentals a difficult beast to grasp at present, the market seems unsure just what it should be doing. The bounce off the low yesterday before a rally back to square occurred when the index hit the 5300 mark, suggesting technical buying. With Wall Street flat overnight and equally unsure of direction, we may well be stuck in a range now for a while, notwithstanding any left of field developments.

June Looms

Brexit risk is increasingly on everyone’s minds. At this stage the polls favour the “stay” vote winning on June 23 but not by any clear margin. Given the referendum is not compulsory, “stay” supporters are concerned it benefits those with a more nationalist bent who may make a point of voting while the status quo-types may not be so committed. Whatever the case, it is as yet too close to call.

The Fed releases its June policy statement one week earlier. Wall Street generally believes the FOMC would not be inclined to cause potential turmoil with a rate hike if a week later a whole new round of turmoil manifests. If a rate hike is otherwise on the cards, it may come down to what the polls are saying as we get closer to the event.

Either way, Wall Street has swung from not expecting a rate hike until at least December to suddenly having to contemplate a hike as early as next month, with potentially more to follow. Yet not a helluva lot has changed in the interim. Wall Street is confused, and cautious.

Janet Yellen will speak on Friday night. It’s a full week away, but already in last night’s session talk is of the market not wanting to do anything bold until Yellen has her say. Recent Fedspeak has been decidedly hawkish but Yellen has a track record of appearing far more dovish than her voting members, seemingly always being the one to pour cold water on rate hike expectations.

We note also that the June Fed meeting is a quarterly, meaning updated economic forecasts and a press conference with the Chair. Often it is the conference and accompanying Q&A that sends markets off in a new direction, rather than the policy statement itself.

Commodities

West Texas crude rolled over into the July delivery front month last night and in so doing, closed the gap on Brent to a negligible amount. WTI is down US30c at US$48.11/bbl and Brent is down US50c at US$48.37. Hard to believe that spread was once US$27, although prices were a lot higher then.

The US dollar index is again steady at 95.24 and thus having no impact on commodity prices. LME traders remain just as cautious as everyone else and devoid of direction. Last night aluminium rose 1% while lead and zinc fell 1% and nickel fell 2%.

Iron ore fell US$3.00 to US$52.70/t.

Gold is down US$3.70 at US$1248.20/oz.

The Aussie is also steady, at US$0.7224.

Today

The SPI Overnight closed down one point.

As central bankers continue to dominate the markets they were once upon a time silent witnesses to, Glenn Stevens will speak today and take a Q&A.

Technology One ((TNE)) will issue an earnings result.

Rudi will Skype-link with Sky Business to discuss broker calls at 11.15am.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Monday Report

By Greg Peel

Buying Mode

There’s really not a lot to say about Friday’s action on the local market. The index rose relatively consistently throughout the session ahead of a bit of Friday-like afternoon profit-taking, while still closing on a robust 0.5% gain.

Every sector finished in the green. The only sectors not to rise at least 0.5% were financials, on 0.4%, and healthcare, on 0.3%, while at 1.3%, tiny info tech was the only sector to exceed 1.0%. Every other sector fell evenly between those two, suggesting Friday’s action was more about index buying than about individual company movements.

And why not? one might ask. What’s the alternative? A term deposit paying 2.5%? A government bond paying much the same over ten years? Both of which are taxable. While eight years down the track investors still shudder at the memory of their GFC experience, and still carry historically high levels of cash, the dividends available in the stock market -- many tax free -- are just too attractive to ignore.

And the latest game in town is How Low Can We Go? Most local economists had been for some time predicting the RBA would need to cut, but even they were taken by surprise by the May move. Now the race is on to predict further cuts, be it one, two or maybe three, down to 1.00%. Those dividends are looking even better.

The ASX200 finished the week at 5350, which is basically the technical target chartists have held onto for months, even as we stared into the abyss at 4800. We are at the “where to now” point and continue to consolidate. The upside must still be favoured, baring anything out of left field, ranging from a sudden retreat in the oil price to a Brexit “yes” vote.

This week will be critical to determining whether market confidence is supported by economic reality. Glenn Stevens will conduct a Q&A tomorrow, where no doubt the one percent question will be raised. On Wednesday we have March quarter construction numbers and on Thursday, private sector capex and capex intentions. That latter number is forward-looking and very closely watched by the RBA.

And on the other side of the world…

Flip everything over, and we have the situation in the US. Having decided only a month a go there was no way the Fed was going to raise again this year, suddenly Wall Street is worried they might. Twice. Maybe even three times.

And the market, many a commentator is suggesting, is not prepared for it. The market is still pricing in the chance of maybe one hike, later in the year. Many believe the Fed will not risk acting ahead of the Brexit vote next month. Many believe the Fed will not risk acting ahead of presidential election in November (despite there being no precedent of holding back in election years). But recent Fedspeak is leaning very much the other way. The Fed is trying to get Wall Street to prepare.

The Dow was up over a hundred points mid-session on Friday night before wavering towards the close. It was a Friday nonetheless, and it was also expiry day for May S&P500 options, which often has an impact. Wall Street finished down for the week but the question going forward is as to whether one should be scared by the possibility of a Fed rate hike, or two, or happy that the impetus behind a Fed hike is a stronger US economy.

In both 2014 and 2015, the US economy bounced hard out of a March quarter slump. In 2016, GDP grew by an anaemic 0.5% in the March quarter. CNBC’s daily GDP tracker, based on rolling data releases, is currently predicting 2.5% for the June quarter. That’s rate hike-worthy on anyone’s terms. The first official estimate of June quarter GDP will not, however, have been released when the Fed meets in June.

The Dow closed up 65 points or 0.4% on Friday night. The S&P gained 0.6% to 2052 as the Nasdaq reversed its recent trend and shot up 1.2%. This was due to a Street-beating earnings result from chip-maker Applied Materials, which sparked a 13% share price jump and a lift for all chip stocks.

The economic data point of the day was April existing home sales, which rose a better than expected 1.7%. Inventory for existing homes for sale is tight, particularly at the affordable end of the market, which is a positive for the economy.

Commodities

All talk on oil markets at present is of supply outages. In particular, production is still down in Canada due to the fires and in Nigeria due to rebels bombing pipelines. The WTI price is hanging around just under, but not yet game to breach, the 50 mark. Lost Canadian production is expected to resume in a couple of weeks, while Nigeria is more ongoing. Rebels bomb pipelines every other week in that troubled land.

The concern is that 50 is a magic level that once surpassed will spark a new round of hedging (forward-selling) from oil producers. This could prove self-defeating. On Friday night West Texas closed down US49c at US$47.75/bbl while Brent was steady at US$48.87/bbl.

The US dollar index was steady at 95.27 but base metals prices were mostly weaker, with copper down 0.5% and nickel and lead down 1%.

Iron ore is unchanged at US$55.70/t.

Gold is off a tad at US$1251.90/oz and the Aussie is steady at US$0.7218.

The SPI Overnight closed up three points on Saturday morning.

The Week Ahead

A revision of the US March quarter GDP result is out on Friday, but those numbers are starting to get a bit stale. Of more interest during the week will be a flash estimate of manufacturing PMI tonight, new home sales and the Richmond Fed index tomorrow, and house prices, new home sales and a flash services PMI on Wednesday.

On Thursday it's durable goods and pending home sales, and on Friday consumer sentiment.

As noted, Australia’s week will be dominated by March quarter construction and capex numbers ahead of next week’s GDP result. And all ears will be on Glenn Stevens tomorrow.

On the local stock front, we’ll see earnings results from Technology One ((TNE)) tomorrow, Programmed Maintenance ((PRG)) on Wednesday, Aristocrat Leisure ((ALL)) on Thursday, and Fisher & Paykel Healthcare ((FPH)) on Friday.

Perpetual ((PPT)) will provide earnings numbers for its investment company on Wednesday, which will also see investor days being held by Boral ((BLD)), Suncorp ((SUN)) and WorleyParsons ((WOR)).

And there are a few more AGMs to get through.

Rudi will Skype-linkup with Sky Business on Tuesday morning, 11.15am, to discuss broker calls. He'll appear on the Sky Business channel on Thursday, 12.30-2.30pm and does the Skype-link again on Friday morning, around 11.05am.

This is also the week a select group of paid subscribers gets to spend a whole evening with Rudi. Should be both fun and interesting.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: Fedspeak

By Greg Peel

The Dow closed down 91 points or 0.5% while the S&P lost 0.45 to 2040 and the Nasdaq fell 0.6%.

Jobs Conundrum

Having held their ground on Wednesday, while other sectors responded to the prospect of a Fed rate hike, yesterday the resources sectors gave way. It was nothing about commodity prices on the day, it was about where commodity prices might end up if the US dollar rises on Fed tightening. The offset of the weaker Aussie made no difference, it would seem.

These sectors have run very hard these past couple of months on the commodity price rebound, so it looks like profits are being taken. Materials fell 2.6% yesterday and energy 2.0%, to provide the bulk of market weakness.

Yield sectors – telcos, utilities and supermarkets – continued to be sold, while the banks, healthcare and consumer discretionary all moved little on the session. Yesterday’s jobs numbers showed an unchanged unemployment rate, and appeared to have no exogenous effect on the market.

The jobs data showed an increase of 10,800 in April, roughly in line with expectations. But the aggregate represents a 20,200 rise in part-time jobs and a 9,300 fall in full-time jobs. This has been the trend in recent months.

The March quarter wage price index, released earlier in the week, revealed the weakest wages growth in decades. Dragging on wages growth is hours worked, which fell 1.1% in April to be down 0.5% year on year – the first negative number since May 2013. The fall in hours worked can be explained by the ongoing rise in part-time work and loss of full-time work.

Overall jobs growth over the past four months has averaged only 6,500, Commonwealth Bank’s economists note, which should be sufficient to send the unemployment rate higher on the balance of population growth. But the unemployment rate, steady at 5.7% in April, has been held down by a falling participation rate – fewer people looking for work.

“Digging below the surface shows that today’s employment report is softer than the headline numbers imply,” says CBA.

We might recall this from the RBA’s April policy statement:

“Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing.”

The outlook for inflation weakened, hence the RBA cut in May. The May statement suggested “Labour market indicators have been more mixed of late”. The subsequent April data look even more mixed. Cleary yesterday’s jobs number only serves to strengthen the case for another RBA rate cut.

Would the RBA go again as early as June? Unlikely. The Fed meets later in June and presumably the RBA would prefer to wait to see if it can score a rate cut by default if the Fed chooses to hike. Mind you, the Aussie, which is holding steady at US$0.7227, has already priced in a second RBA cut.

More Fedspeak

As long as the US economy continues to perform to the expectations of New York Fed president William Dudley, then “I think a tightening in the summer, the June, July timeframe is a reasonable expectation,” Dudley said last night. The Dow subsequently fell another 200 points.

The Dow managed to claw back a hundred points over the course of the afternoon but the theme remains the same – all of a sudden the Fed rate hike no one was expecting in June is now a possibility. Not a strong possibility, despite Fedhead jawboning – the market is currently pricing in a 26% chance – but a possibility nevertheless.

It is assumed, however, that if the Fed does not end up hiking in June or July, the purpose of recent more hawkish commentary and insistence June is “live” is more about making sure markets prepare for when there is a rate hike, maybe later in the year, and not be caught out by one, prompting undue volatility.

After a string of very poor earnings results from US major chain stores, the tide has turned a little as the earnings season draws to a close. Good results were posted last night by a couple of specialist apparel chains, and Wal-Mart surprised and enjoyed a 9% rally, which went a long way to buffering the Dow.

It is more likely, nonetheless, that this is a response to a result that was not as bad as had been feared following earlier shockers from major chains, which had investors dumping Wal-Mart in the lead-up.

A close of 2040 on the S&P500 last night means a breach of the 2043 level, which is technically significant for the simple reason it is the “flat on year” point. Traders have been suggesting a breach of this level could set in trend to a more pronounced down-move.

Commodities

A report suggesting a solid rise in US oil demand last week helped keep prices supported last night. West Texas crude is up US36c at US$48.24/bbl and Brent is up US32c at US$48.86/bbl.

The US dollar index is slightly higher over the period, up 0.1% at 95.30.

Given the LME was closing just as the Fed minutes were released the night before, last night’s price action is more indicative of a response. Aluminium fell 0.5%, copper, lead and nickel 1% and tin and zinc 1.5%.

Iron ore fell US20c to US$55.70/t.

Gold is down US$3.30 at US$1254.70/oz.

Today

The SPI Overnight closed down 6 points.

The shares of the big miners were weak again in London last night, but it’s a case of who is following who.

Woodside Petroleum ((WPL)) holds its AGM today.

It is Rudi's intention to link up with Sky Business through Skype this morning but election coverage might throw a spanner. If the plan goes ahead he should appear around 11.05am.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

The Overnight Report: June Strengthens

By Greg Peel

The Dow closed down 3 points while the S&P closed flat at 2047 and the Nasdaq rose 0.5%.

Will They, Won’t They?

While the Australian market is presently not dutifully following Wall Street around, given a widening disparity between the industries that primarily drive each market, US central bank policy is very much a factor Australian investors need to pay heed to. Interest rates connect the world.

On Monday night the Dow fell close to 200 points following stronger than expected US inflation data and Fedspeak reaffirming that the June Fed meeting is “live” and that a rate hike cannot be ruled out. However the US bond market shrugged off the possibility and remained unmoved, as did the US dollar and gold. Last night was a very different story, but we’ll get to that in a minute.

Yesterday the ASX200 plunged 48 points on the open, came back to almost square at lunchtime. It was a battle, it would seem, between those believing a Fed rate hike is possible and those who don’t. Or perhaps between those who think a Fed rate hike is a problem for the Australian market and those who see any dip as a buying opportunity. Or both.

But to further complicate the matter, the morning saw the release of the Australian March quarter wage index data. At 2.1% annualised, the quarter saw the weakest growth on record for the series. This suggests both low inflation and less consumer spending power. And reinforces the potential for another RBA rate cut.

But if the Fed hikes in June, would the RBA hold off? How will it all balance out?

As confusion reigned, the ASX200 fell again in the afternoon, closing down 39. Sector moves suggested yesterday was all about interest rates, and their flow-on effects.

The resource sectors stood aside, balanced by stronger commodity prices. A stronger US dollar weighs on commodity prices but a weaker Aussie dollar improves earnings, so there is some trade-off either way.

Consumer staples fell 1.2% and discretionary 1.5%. Low wages are not promising for retailers, and a Fed hike might prevent another RBA cut.

The banks fell 0.8%. Low wages are not promising for mortgage demand and if the RBA does not cut, demand will not be boosted. Bank yields are less attractive if US rates rise and/or Australian rates don’t fall.

The telcos fell 0.9% and utilities 0.7%. The yield story is the same here.

Healthcare only fell 0.1%. The sector derives a lot of income from offshore, and thus benefits from a weaker Aussie. Industrials fell 1.1%. This sector offers a mixed bag of winners and losers.

The Aussie has fallen over a cent over 24 hours to US$0.7227. Yesterday’s local wage data encouraged further weakness in the currency, albeit it has already fallen quite a way from its recent highs, but last night’s Fed minutes stuck the knife in.

Backflip

When the FOMC released its policy statement following its meeting in April, the tone was dovish. Wall Street reduced expectations of a June rate cut to near zero. This was reinforced by the April US jobs numbers, which were to the low side.

Last night the minutes of that meeting were released, and suggested the FOMC statement on the day was somewhat misleading. This might explain why Fedheads have recently been out and about talking up the possibility of a June rate hike. The Fed is worried markets are not prepared.

The minutes suggested the FOMC is no longer concerned about the global volatility factor, as markets have now recovered from their panic earlier in the year and settled down again. That just leaves US data. While recent data have not been all that strong, the question is whether they are weak enough to justify near-zero interest rates. On a trend basis, the US labour market remains positive, If the CPI data are anything to go by, inflation is heading the right direction.

These are the Fed’s two mandated policy drivers.

The bottom line is, the minutes basically suggested the Fed is not waiting to be given a reason to hike in June, it is waiting for any reason not to hike. Not only is June very much “live”, Wall Street now sees a June hike as very much a possibility.

Having fallen 180 points on Monday night on this very possibility, last night the Dow had rallied back a hundred points ahead of the 2pm release of the minutes. A two hundred point fall ensued on the release, followed by a one hundred point recovery.

Wall Street finished square. Arguably, June rate hike potential has been priced in the night before. But the night before, the US bond market, currency and gold markets had shrugged off the possibility.

Last night the US ten-year yield jumped 12 basis points to 1.88%. The US dollar index jumped 0.7% to 95.20. Gold fell US$20.80 to US$1258.00/oz. Now all the markets are aligned.

The only possible barrier to a June rate hike, assuming no US economic shocks occur between now and June 15, is the Brexit vote. It doesn’t occur until June 23, and some believe the Fed is more likely to hold off until the July meeting in case a Yes vote sparks fresh global turmoil. Recent polls suggest the No vote appears to be gaining traction, nonetheless.

Commodities

For commodities, it was all about the jump in the US dollar that a Fed rate hike implies. Gold’s move has been noted.

West Texas crude is down US71c at US$47.88/bbl and Brent is down US94c at US$48.54/bbl.

The LME was shutting its doors just as the minutes were released so there may yet be a more pronounced reaction tonight, but all metals closed slightly lower bar aluminium, which rose 0.8%.

Iron ore never pays much attention to outside influences. It’s up US20c at US$55.90.

Today

The SPI Overnight closed down 4 points. While this reflects the flat close on Wall Street, we might also suggest, a la Wall Street, that the local market adjusted yesterday to heightened Fed rate hike possibility.

With regard the Aussie, it might be a whole new ball game this morning when the Australian jobs numbers are released for April. Presumably the market has now become quite short.

Apologies to readers who have been stuffed around by the FNArena calendar suggesting James Hardie ((JHX)) was to report on Tuesday, or on Wednesday. Short of contacting a few hundred companies over the course of a year, we rely on broker calendars, which often clash.

Note also that companies are not legally obliged to advise on a reporting date, or even stick to it if they have.

James Hardie reports today.

Rudi will make his weekly guest appearance on Sky Business today, 12.30-2.30pm and then return for an interview on Switzer TV between 7-8pm.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

article 3 months old

RERUN: Material Matters: LNG, Ferrochrome, Iron Ore, Steel, Tin, Nickel And Cobalt

- Official reponse from Roy Hill
- Ill-timed expiries for LNG
-Ferrochrome needs constraints
-Supply-side cuts help iron ore 
-Steel slump blamed on sentiment
-Minor tin deficit anticipated
-Stockpiles building in nickel
-Strong upside to cobalt likely

[Note from the editor: the story below was originally published on 17th May 2016. We are republishing the story unchanged to include an official response received from Roy Hill after its original publication. The response from Hoy Hill reads: "We can confirm that Roy Hill is ramping up production as planned and is expected to achieve a full capacity run rate equivalent to 55 Mtpa by the end of 2016 as previously communicated to the market." This statement was made in response to UBS's assertion that production at Roy Hill is not ramping up fast as expected, see further inside the story below.]

By Eva Brocklehurst

LNG

With substantial volumes of LNG offtake in the Pacific Basin set to expire by 2020, Deutsche Bank expects LNG producers will attempt to roll forward expiring volumes into new deals. Still, this is ill-timed, in the broker's view, as the LNG markets in the Pacific Basin are over-supplied for the rest of the decade and excess LNG is heading to Europe.

From the broker's analysis of LNG contracting profiles for key LNG buyers with offtake expiries out to 2020, the conclusion is that the buyers will have little appetite to roll forward expiring volumes in the absence of a positive demand shock.

Deutsche Bank expects LNG projects with expiring offtake to 2020 will probably need to either sell uncontracted volumes into spot LNG markets, or alternatively, offer short-term offtake to Asian buyers at spot pricing.

In the broker's coverage, Woodside Petroleum ((WPL)) has the most exposure to LNG volumes, with a spot LNG price of US$6/mmbtu to 2020 every US$1/mmbtu move in the spot price is calculated to impact 2020 earnings by 5.0%.

Ferrochrome

The global market in ferrochrome has picked up recently and Macquarie observes that while a recovery in the South African rand has played a part, this also suggests stainless steel production is recovering faster than expected.

Taking a longer view, the broker observes ferrochrome is lacking in raw material constraints. Ore stocks are set to remain at comfortable levels over the next five years. To change this status, Macquarie suspects a 12-week inventory is needed as a minimum.

By 2020, the broker forecasts 3.1% compound growth in stainless steel output. To reach a 12-week inventory 3.7% growth is required, while any growth above 4.0% is expected to rapidly accelerate constraints on the market.

Iron Ore

Improving fundamentals, rather than speculation, have been real driver behind rising iron ore prices, in the opinion of analysts at ANZ. Despite rising speculation in Chinese futures contracts they do not expect prices to push back below US$50/t on a sustainable basis.

Outside of some volatility in futures markets, demand for physical cargoes has been consistently strong and this is backed by the data, the analysts observe, as steel production has increased while construction activity in China has picked up.

Supply side issues have also helped. The analysts observe Roy Hill is not ramping up as fast as expected and there has been a decrease in both BHP Billiton's ((BHP)) and Rio Tinto's ((RIO)) production guidance over the next 18 months.

Low prices have also affected Chinese domestic production. The analysts note run-of-mine output is down around 10% for the first three months of the year. Moreover, because of falling grades, they calculate the iron units produced in China over the same period are down over 20%. If this is maintained the market should return to balance by 2018, the analysts suggest.

Steel

The physical steel market in China has frozen, Credit Suisse observes. The broker was expecting prices to ease back, but not slump. The rapid change in just a week is reflecting sentiment, not fundamentals, the broker maintains.

Construction continues and infrastructure projects in China are still starting up, while inventories of steel traders at at historical lows. The broker doubts April steel production overwhelmed demand but suspects the rapid fall was a buyers strike as sentiment turned sour. Re-stocking should follow and prices lift again, although maybe not as high as previously.

Credit Suisse doubts futures trading curbs were a reason for the halt in the steel trade but suspects it follows weak trade data in China and a suggestion that the country's economic growth is L-shaped.

Tin

The London Metal Exchange tin price has performed better than Macquarie expected, up 19% from its low. At this level - US$16,600-17,000/t - all global production is considered to be cash positive.

The reasons for the rise, the broker maintains, is low export volumes from Indonesia, as that country clamps down on illegal mining, and reductions in output from China, which accounts for 80% of domestic refined tin output and 40% of the world's production.

Meanwhile, Macquarie observes, demand has been better than expected as stronger data is reported in electronics markets, and tinplate production is boosted by the broader rally in Chinese steel production. The broker anticipates a minor deficit running in 2016.

Nickel

As positions on the LME turn more positive, Deutsche Bank notes nickel has avoided the speculative flurry that has driven iron ore and steel. Currently spot prices for the metal mean that close to 60% of the industry is loss making, the broker calculates.

To counter the impact of the closure of Queensland Nickel, the government in New Caledonia has permitted two more companies to export nickel ore to China. Deutsche Bank also observes a number of miners continue to build stockpiles of either low-mid grade saprolite or, in one case at least, high grade saprolite, with the aim of selling at higher prices.

Positive signs exist but the broker believes these should be met with caution. LME inventories have been falling and channel checks suggest some metal is being moved back into off-exchange stocks in China. Also Chinese stainless steel prices have started to recover from early lows. The broker forecasts a deficit in 2016 but this is contingent on further price-related supply cuts.

Cobalt

Macquarie notes interest in the cobalt market has picked up again in the past couple of weeks with the announcement of the China Molybdenum offer for a stake in the Tenke Fungurume operation in the Democratic Republic of Congo (DRC).

The main revenue stream is copper but the asset represents a much bigger share of the global cobalt supply at 17% of mined output, on the broker's estimates.

This cobalt is important to China, as 93% of units sold there originate in the DRC, and this is the highest proportion of a commodity supply from a single country that Macquarie can find. This is also a commodity where China has very little resources.

Nevertheless, the cobalt market has disappointed the broker over the past few months as, unlike its rechargeable battery counterpart, lithium, cobalt prices have fallen and stabilised at their lows. The challenge is, as Macquarie envisages, an overhang in supply after a surge in exports to China last year.

The broker believes the demand growth profile remains one of the best among industrial metals and an ever-growing refined market deficit to materialise over coming years. A 40% upside in the cobalt price to US$15/lb is expected by 2020.
 

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