China Jitters For Energy And Industrial Metals
Saxo Bank | Mar 12, 2014 08:34AM ET
Industrial metals have seen some of the biggest losses over the past week as worries about China's ability to maintain its role as a driver for increased demand has been put into question. Trade data for February, which showed a sharp drop in imports of key commodities such as copper, iron ore and crude, has lead to a rout in the market for industrial metals with the LME metal index down by 6 percent in just four days. The energy sector also depends on support from a continual rise in demand, and the recent date has put that in doubt. As a result of this, combined with rising inventories of crude oil in the US, both WTI and Brent Crude have seen a return to negative movement.
Precious metals have also slowed, with gold and the platinum group metals still holding onto positive momentum while silver has been caught up in the weakness that is hitting industrial metals. Gold reached its highest level since October today as weaker stock markets and the ongoing turmoil in Ukraine provided the metal with a boost from investors looking for an alternative investment. Gold has seen its positive momentum slow during the past week while it settled into a range. However, a close above USD 1,362/oz today may provide the technical boost needed to target the next level at USD 1,380/oz.
Copper has been on the slide for the past four weeks but the sell-off since last Friday has been particularly aggressive. Trade data for February, which showed a 29 percent drop in copper imports compared to the record month of January, together with China's first bond default and a recent surprise weakening of the renminbi, have all helped to create some nervousness in the market.
Copper inventories at warehouses in China are currently at levels not witnessed since the historical highs in late 2012, according to one report. An undisclosed but significant share of Chinese copper has been used as collateral to borrow dollars at a low rate. The proceeds were then converted into high-yielding renminbi, lent in the shadow banking sector or simply used as collateral to obtain finance. The recent surprise weakening of the renminbi and a bond default has raised concerns about potential losses on these trades and this is the driver behind the current weakness as traders ultimately worry that an unwinding of some of these deals could unleash unwanted copper into an already oversupplied market.
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The near-term outlook for WTI crude oil has continued to deteriorate since the Ukraine spike on March 3. A slump in Chinese crude oil imports in February combined with rising inventory levels has left a record net-long hedge fund position exposed to a correction. Yesterday, the front month futures contract broke back below its 200-day moving average leaving the contract exposed to an extension, initially towards USD 98.23, which is the 50 percent retracement of the January to March rally, followed by USD 96.58.
The weekly US inventory report due on Wednesday at 14.30 GMT is expected to show a seventh consecutive weekly rise in crude oil inventories, this time by two million barrels, according to a Bloomberg survey. The rise will be driven by reduced demand from refineries as they exit winter production and begin maintenance and the turnaround towards gasoline production.
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