AFKI Commodities Report: Platinum Rally On South Africa Mine Violence

Mounting tensions in South Africa’s platinum belt and Ukraine worries are driving platinum and palladium prices higher. Crude oil also moved up on Ukraine as well as further stock drawdowns at the key Cushing hub and U.S. exports talks. Among softs, coffee continued to trend lower but cocoa edged up from last week’s three-month lows.

Platinum and palladium futures rallied strongly as violence erupted in South Africa’s platinum belt as striking mineworkers tried to prevent others returning to work, resulting in three fatalities and a number of assaults at the weekend and a further death on May 12, according to local reports.

Some mineworkers from the Association of Mineworkers and Construction Union (Amcu) started to return to work after the affected three producers made their wage offer directly to the employees, side-stepping the union.

The strike has cost Anglo American Platinum (Amplats), Impala Platinum (Implats) and Lonmin whose South African mines have been halted by the 16-week strike more than R18 billion ($1.75 billion) in lost revenue to date.

A war of words continues between Amcu and the three companies, with Amcu applying to the country’s Labor Court to prevent the producers communicating directly with employees.

Meanwhile, Lonmin is reported to be considering court action to halt the strike. The company in its latest production report said it had lost 2.535 million tonnes of underground production during the three months to March 31 of which it said 2.515 tonnes were lost due to industrial action.

Analysts and other market watchers believe this is the beginning of the end of the strike which began on Jan. 23. However, given the escalating tensions, platinum and palladium prices are spiking higher.

South Africa produced around 72 percent of global platinum production – some 4.12 million ounces- and about 37 percent (around 2.35 million ounces) of world palladium production last year, according to data from Johnson Matthey. But until recent days, the labor dispute had had limited impact on prices as the industry was able to build up stocks ahead of the strike.

Palladium prices also continue to be driven higher on continuing tensions over Russia’s involvement in eastern Ukraine, amid worries that trade sanctions could be imposed against Russia.

Russia is the biggest producer of palladium, accounting for 42 percent of worldwide palladium supply or 2.7 million ounces last year, including primary production and reserve sales. The country is also the second-largest producer of platinum, accounting for around 14 percent of world production in 2013.

Platinum for July delivery settled at $1,485.70 an ounce on the Comex division of the New York Mercantile Exchange (Nymex) on May 14, up $55.80 on last week’s finish of $1,429.90, and the highest close since March 8. Palladium for June delivery on Comex closed at $828.80 an ounce, its highest settlement since Aug. 1, 2011 and a $29.05 gain on last week’s close.

Gold also continued to find support from the events in Ukraine. The precious metal typically benefits at times of geopolitical uncertainty, given its safe-haven investment appeal. Gold for delivery in June on Comex broke above $1,300 an ounce on May 14 to settle at $1,305.90 an ounce, a gain of $18.30 on last week’s close.

Crude oil up on Ukraine, US exports talk

U.S. crude oil prices climbed above $102 a barrel on escalating tensions in eastern Ukraine and a further fall in crude stocks at the key Cushing, Oklahoma storage hub last week. News that the U.S. government is considering lifting its longstanding ban on crude exports amid growing domestic oil production also provided support.

The benchmark West Texas Intermediate (WTI) for June delivery on Nymex finished at $102.37 a barrel on May 14, having closed last week at $99.99.

Worries about mounting tensions in Ukraine also pushed Brent crude higher, with the July contract on the London-based ICE Futures Europe exchange settling at $109.31 a barrel at midweek, up $1.82 on where it began the week at $107.49 a barrel.

The U.S. government’s Energy Information Administration (EIA) on May 14 reported a further near 0.6 million-barrel decline in crude stockpiles at the Cushing hub, the Nymex contract’s settlement point, for the week ending May 9. But the country’s overall commercial crude inventories showed an unexpected rise of 0.9 million barrels to 398.5 million barrels. The market had been expecting a second week of decline in crude stock levels.

The EIA data also showed that domestic production rose 78,000 barrels a day to 8.428 million last week, up 1.103 million barrels on a year ago and the highest since October 1986. Amid the surge in domestic output as a result of shale oil plays, the U.S. is now in the process of evaluating its ban on crude oil exports, according to news sources quoting U.S. Energy Secretary Ernest Moniz this week.

Moniz has hinted at studying crude oil exports before, but his comments on May 13 were seen as the strongest yet.

Arabica extends losses, cocoa edges up

Among soft commodities, arabica coffee continued to trend lower but cocoa edged up from the three-month lows hit last week. The benchmark July cocoa contract on New York’s ICE Futures U.S. exchange settled at $2,892.50 a tonne at midweek after touching $2,849 a tonne on May 8, the lowest for the second-position since late January. On London’s NYSE Liffe exchange, cocoa for the delivery in the same month settled at £1,813 a tonne on May 14. Liffe July cocoa had sunk to £1,771 on May 8, the weakest for a second-position since late January.

An improved supply outlook in West Africa, where the mid-crop harvests are underway is leading to some easing of deficit concerns by some market watchers. Plentiful rain has led analysts to raise cocoa output forecasts for the region and particularly for top producer and exporter Cộte d’Ivoire.

Marex Spectron, a leading privately owned broker of financial products in the commodities sector, is among those to have cut their forecasts of the 2013-2104 global cocoa deficit estimate. Last week, the firm cuts its global supply deficit estimate to 40,000 tonnes from the 134,000 tonnes estimate made last September.

However, the increasing risk of an El Niño weather event as early as July is limiting the downside price fall potential. El Niño often leads to disproportionate dryness in West Africa.

Expectations of a sizeable global supply deficit had led cocoa futures prices to rally to reach more than 2⅟2 year highs in March. The second-month contracts on ICE and Liffe had reached peaks of around $3,027 and £1,888 a tonne respectively.

Sugar rallies on Brazilian output dip

Raw sugar reversed the recent downtrend which saw the benchmark July contract on ICE Futures U.S. exchange touch a two-week low of 17.08 cents a pound on May 8. On May 14, the second-month contract settled at 18.26 cents a pound, up 1.09 cents on where it started the week. Earlier in the day, July raw sugar had touched 18.28 cents, its strongest level since March 28.

White, or refined, sugar also rallied on London’s NYSE Liffe exchange, with the August contract climbing to a 6⅟2 month highs on May 14, finishing at $494.50 a tonne.

The rally followed Brazil’s sugar cane industry association, Unica’s reported lower sugar output in the country’s Center-South, the country’s main cane-growing area, for the 2014-2015 sugar year to April 30. Production fell 13.3 percent to 1.475 million tonnes from 1.70 million tonnes over the same year-earlier period, the Unica data showed.

The London-based International Sugar Organization (ISO) sees sugar production in Brazil’s Center-South dropping from 34.3 million tonnes in 2013-2014 (Oct. 1-Sept 30) to 33.4 million tonnes in 2014-2015, according to its latest Quarterly Market Outlook, released May 13. For Brazil as a whole, the industry body forecasts production to fall from 37.5 million tonnes to 37 million tonnes. In addition to the impact of drought on the Center-South output, processing capacity is reducing due to a number of sugar mills closing in the region.

Worries about the El Niño weather risk are helping provide some support to prices. But price gain potential is being capped by expectations of a further build in what are already more than ample global stocks by the end of the current crop year despite the uncertainties over the Brazilian crop due to drought damage.

The ISO currently expects a further 2.017 million tonnes, raw value, to be added to world sugar stocks by the end of the current sugar year i.e. Sept. 30, 2014 and export availability still to exceed import demand by 2.410 million tonnes.

“If our current import projections are validated by the end of this season, the unsold sugar will be added to opening stocks next season,” ISO said. “Hence, in October 2014, world stocks could be as high as 80 million tonnes or more than 45 percent of annual global sugar use.”

However, based on possible changes in production and projected consumption growth the organisation indicated “a neatly balanced global supply and demand coming into view [in 2014-2015], heralding the end of the surplus phase in the world sugar cycle”.

However, ISO warned that any price recovery on the back of a ‘no stock change’ scenario in the next season might be muted by the huge stocks accumulated since the beginning of the surplus phase in 2011-2012.

Before the rally to four-month highs of 18.47 cents a pound in April at the peak of the concerns about Brazil’s drought-related crop damage , raw sugar was trading at 3⅟2 year lows in January in a market weighed down by the huge global surpluses of the sweetener. The most-active contract on ICE – then March – recorded its lowest settlement since early June 2010 on Jan. 22 at 15.03 cents a pound.

Arabica coffee futures continued to retreat from the 26-month high of $2.1892 a pound reached on April 23 on worries that top grower and exporter Brazil’s 2014-2015 (April 1-March 31) output would be badly affected by the extreme hot, dry weather conditions that the country’s main southern coffee-growing areas, especially Minas Gerais and São Paulo, suffered in January and February.

Talk that the extent of the drought-damage to the country’s 2014-2015 crop may not be as great as feared pressured futures prices in recent days. Benchmark arabica for July delivery on ICE Futures U.S. on May 12 slipped to $1.8280 a pound, the weakest since April 4, before settling at $1.8943. At midweek, July arabica closed at $1.8523 a pound, marginally up May 9’s finish of 1.8465.

The U.S. Department of Agriculture’s (USDA) Brasilia bureau on May 12 released its first forecast of Brazil’s coffee production for the 2014-2015 marketing year (July 1-June 30), pegging output at 49.5 million 60-kg bags, a 7.8 percent or 4.2 million bags-decline on the prior year. Of this total, the USDA bureau projected the arabica crop at 33.1 million bags, down 6.3 million compared to its revised figure for 2013-2014 of 39.4 million bags. However, the USDA bureau said it was “unclear” to predict to what extent the prolonged drought and high temperatures in January and February will affect the final size of the crop and a more precise number will be available only after the harvest. Brazil’s arabica harvest should begin in May/June.

The Brazilian government’s crop bureau, Conab, also reduced its estimate for the country’s 2014-2015 coffee crop. Conab said May 15 Brazil probably will harvest 44.6 million bags. This compares to a range of 46.5 million to 50.2 million bags forecast by the crop bureau in January.

Other forecasts to date have been lower. Volcafe, the Switzerland-based coffee division of commodities group ED&F Man, for example, in its first projection on Brazil’s output for the 2014-2015 crop year (April 1-March 30), estimated production at 45.5 million 60-kg bags, down 10 percent from its previous projection of 50.7 million.

Meanwhile, ICE cotton futures were also weaker after the USDA forecast higher production, lower demand and rising global stocks for 2014-2015. The most-active July cotton contract on ICE Futures U.S. fell to a one-month low of 90.50 cents a pound on May 12 before settling at 91.30 cents, down 1.06 cents on last week’s close. By midweek, July cotton settled lower at 90.70 cents a pound.

USDA in its latest Wasde report, released May 9, said it forecast U.S. production at 14.5 million 480-pound bales in 2014-2015, up from the estimated 12.91 million bales in 2013-2014. It expects U.S. ending stocks to rise to 3.9 million bales, from 2.80 million bales in the current crop year.

The government department’s global outlook was downbeat, projecting world cotton ending stocks to rise to 101.66 million bales, up from an estimated 97.91 million bales for the current 2013-2014 season. It warned that China’s imports are expected to fall about one-third in 2014-2015 as the country’s government is likely to restrict imports in favor of consumption of domestic cotton as part of its overhaul of its stockpiling program for the fiber. According to the USDA, China’s beginning inventories are expected to reach nearly 60 million bales, more than 60 percent of total world stocks.

While care has been taken to ensure that the information contained in this report is accurate, it is supplied without guarantee. The author can accept no responsibility for any errors or any consequence arising from the information provided.