Commodity Review 20190816 by Andrew Pedler – Now available

Commodity Review 20190816 by Andrew Pedler – Now available

USA – Housing Starts, Industrial Production, Electricity End-Use, Bond Yields

Matau’s Comments:  

  • USA   is slowing!  Data this week reinforces last week’s OECD CLI implications.
  • Base metal inventories continue to remain tight.   Most prices are in the ‘nose of pinch-point graphs.  Pinchpoint positions are mostly less than 1 week’s consumption.   However sentiment (geopolitical) continues to drive prices over fundamentals.  
  • Several metals (Ni & Co this week)  are showing signs that reduced supply is likely to lead to higher prices.
  • Outlook is for ‘not enough’ new mine supply in coming years (the next decade), for several key commodities. 

The theme of the Resources Rising Stars conference at the Gold Coast earlier this year is appropriate:  “Pick the stock, not the market”.



*Copper  Codelco optimistic about long term price for Cu.  Short term prices pressured by growth concerns.

*Cobalt  Co price is up on news that Glencore is shutting its large DRC mine.

*Nickel  Philippines’ largest exporter of ‘high’ grade Ni laterite ore is to shut upon depletion of its Reserves.

*Zinc & Lead  ORN calling for ongoing need for more Zn & Cu production.  Nyrstar Pb smelter stopped again.

*Tin  Trump acknowledges that tariffs increase domestic prices.  Delays new tariffs till after Christmas.

Aluminium  Beijing announced additional import scrap quotas.

*Gold  Gold price gains as faith in Central Banks is about to be tested again.

Platinum & Palladium  Progress … of sorts … being made in wage negotiations with AMCU..

*Oil  .Russia & China have stuck by Venezuela, though that may change.

Coal  A weaker CNY, a safety campaign, shipment restrictions, though premium HCC is preferred.

Iron Ore  Beijing’s stimulus restraint driven by low infrastructure spend, impacting prices.

Shipping  Baltic indices, Cape, Panamax & Handymax up this week.


Port Hedland – Iron Ore shipments:  Shipments down in July after a bumper June effort.

USA – Electricity End-Use:  Total demand slowing, mostly in residential demand.

USA – Bond Yields:  A historical review + Current 10yr-2yr curves ‘almost’ inverted.  10yr-3mo is!

USA – Industrial Production – Capacity Utilisation: Really slow IP growth.  Cap Util is sub optimal.

USA – Housing Starts:  House starts almost stalled.

USA Construction Spending 2018095 – looking back in time to the 2008 GFC

USA Construction Spending for July recorded +5.8% yr-on-yr growth, which is quite strong growth, and consistent with rates over the past 3-4 months. This is reflecting current ongoing steady and strong economic growth in USA, accelerated somewhat by stimuli from Washington, which have been described by some economists as unnecessary.

What is interesting however is looking back in time and noting that Residential Construction Spending peaked and decisively turned down in February 2006, well ahead of the sharp decline of the global financial crisis (12 September 2008 when short term US interest rates also recorded a dive).  Non-Residential Construction Spending did not peak till November 2008 (roughly when 10 yr bond yields reduced).

Those involved in new house construction had clearly decided to pull back on spending in that segment approximately 18-24 months prior to the financial crisis actually being recognised and hitting the wider markets.  … Surprisingly, much of the market had expressed no great sense of alarm at the time until the September quarter of 2008.

The financial mess that was the loans approval systems, and other financial instruments, related to the USA housing construction sector was truly only a ‘financial’ crisis, (similar in a sense to the 1987 financial crisis, related to over-valuation of shares).

What changed the level of the crisis was when banks no longer had confidence in lending to each other, and for example, stopped issuing letters-of-credit.  The ‘financial‘ crisis then morphed into an ‘economic‘ crisis, as the inability to obtain letters of credit meant that, among other impacts, producers selling mineral concentrates, or other products, who normally obtained a letter of credit to ensure payment upon arrival and receipt of goods, and ship owners who would obtain a letter of credit to ensure payment upon discharge of cargo at destinations, could not get those (bank-backed) letters assuring payments.

The 2008-9 crisis actually stopped trade!  That is where the comparison with the 1987 crash differs; the 1987 trade in products, minerals and metals barely missed a beat, with ‘industry not suffering greatly.  Consequently the somewhat bruised share markets were able to recover in a relatively short few years.

Fortunately the current levels and trends of US housing construction are not suggesting that any crisis is looming

There have been some mutterings about the finance approvals for US vehicle sales, which had recovered faster and further than housing in the USA.   Residential Construction peaked at USD 683,903m in January 2006, and has recovered so far to USD 566,595m as at July 2018.  Housing Starts peaked at 2.3 million units in January 2006, and by May 2018 had recovered to 1.8 million units while Orders-to-Vehicles had peaked in July 2007 at USD 44,810m and as at July 2018 was well past this at USD 60,117m.   (I do not expect that orders to vehicles (part of the Durable Goods manufacture grouping, will include imports).  However I have no further particular insights into vehicle finance approvals in the USA at present.

USA Construction Spending – Residential & Non-Residential. Source: USA Bureau of Census, Matau Advisory