AFKI Commodities Report: Palladium At 13-Year High On Supply Worries

Palladium prices hit their highest level since February 2001 and platinum remains strong on supply concerns; Crude oil prices extend losses as Iraq supply worries recede and exports from Libya look set to increase. Among softs, cocoa slipped from last week’s near 3-year high, while arabica coffee, sugar and cotton were also lower.

Platinum and palladium prices continue to strengthen amid ongoing supply concerns over supplies and strong demand from the automotive sector. Investor demand for palladium has also surged, with holdings in palladium-backed EFTs hitting a record early this week.

Spot palladium was fixed at $873 an ounce in the pm fix on London’s Platinum and Palladium market on July 9, its highest since February 2001. This level was revisited in the am fix the next day. Palladium September futures on the New York Mercantile Exchange (Nymex), meanwhile, settled at $872.70 an ounce on July 9, a tad below the previous day’s close at $872.90. The precious metal has gained around 6 percent since the end of South Africa’s five-month long mine strike more than two weeks ago and is 21 percent higher since starting the year at $723 an ounce spot basis.

Platinum has continued to trade near the 10-month highs reached last week, with spot platinum being fixed at $1,512 an ounce in London’s pm fix on July 10. Nymex platinum futures for October finished at $1,506.90 on July 9, up around $35 on immediate post-strike levels.

South Africa’s biggest mineworkers union, the Association of Mineworkers and Construction Union (Amcu), announced the platinum mining sector strike was “officially over” on June 24 after a wage deal was struck for more than 70,000 mineworkers.

Workers started returning to work on June 25. But since then, other smaller strikes have broken out, notably, at Impala Platinum’s Marula mine where 2,000 workers began an illegal strike on July 4.

The industrial action at Marula is understood not to be supported by the majority union, the National Union of Mineworkers, and thus is seen as ‘illegal’. Operations at Marula were not affected by the earlier industrial action.

Supply concerns for palladium are also being fuelled by lingering worries about how export flows of the metal from top producer Russia might be constrained in the event of deeper-reaching sanctions by the EU in response to Russia’s involvement in Ukraine. Russia is the top supplier of the precious metal.

Demand for platinum and palladium is also moving higher on the back of a strong rebound in car sales in the U.S. and China in particular, which have helped support a recovery in demand for both pgms for their use in auto catalysts. Auto catalysts account for around 67 per cent of palladium demand and nearly 40 percent of platinum demand.

Palladium is heading for a record global supply deficit this calendar year. In its most recent supply forecast report, London group Johnson Matthey, for instance, projected a 1.6 million ounce global deficit for palladium, while it pegged the platinum deficit at 1.2 million ounces.

Oil prices extend losses as supply concerns ease

Oil prices declined further this week as supply worries continued to ease. Brent North Sea crude, the international benchmark, came under particular pressure from the prospect of increased export flows from Libya.

Concerns about potential supply disruptions from Iraq have also continued to wane. Brent North Sea crude for delivery in August on London’s ICE Futures Europe exchange closed at $108.28 a barrel on July 9, down $2.36 on last week’s finish and its lowest point in two months.

Libya’s National Oil Corporation (NOC) last week lifted the force majeure on exports from the country’s two largest eastern oil terminals of Es Sider and Ras Lanuf after a rebel group that had been blockading the two ports for nearly a year handed them back to the government.

The two terminals have capacity to load a combined 550,000-560,000 barrels a day and the Libyan government is reported to have some 7.5 million barrels of oil stored at the two ports. Production at Libya’s largest oil field, El Sharara, also is reported to have been resumed following the lifting of the force majeure on Es Sider and Ras Lanuf.

El Sharara can typically produce 340,000 barrels a day. Countrywide, Libya was producing around 1.4 million barrels a day of oil early last summer but output dipped to a low of 150,000 barrels a day during the height of rebel group blockades and various politically-motivated strikes.

Many now view the prospect of Iraq’s oil export shipments being disrupted by the present unrest in the north of country as unlikely. Around three-quarters of the country’s oil production is in the south of Iraq and all of its crude exports (not including those from the semi-autonomous Kurdish region) are handled at its southern export facilities, far away from the current fighting.

Iraq’s oil ministry in fact recently indicated oil exports would accelerate this month (July) compared to an average 2.5 million bpd in June and 2.58 million bpd in May (oil ministry data), although a figure for July was not provided.

U.S. crude prices also came under further pressure with the benchmark West Texas Intermediate (WTI) for August delivery on Nymex closing at $102.29 a barrel on July 9, down $1.48 on last week’s finish and its weakest level since mid-May.

The U.S. Energy Information Administration (EIA) in its weekly report on July 9 indicated a 2.4-million barrel decline in the country’s crude inventories for the week ending July 4, a bigger fall than the market had expected. But this positive news was offset by an increase in stocks at the key Cushing, Oklahoma, storage hub, during the same week.

Cushing is the delivery point for Nymex crude futures. The EIA also reported U.S. crude oil production reached over 8.5 million barrels a day during the week to July 4, the highest output since October 1986.

Cocoa slips on European grind data & increased supplies

Among softs, cocoa futures in London hit one-month lows on disappointing European grind data, which is seen as a measure of demand, while cocoa prices on New York’s ICE Futures U.S. exchange eased back from recent near three-year highs.

Cocoa for delivery in September dipped to £1,897 a pound – the weakest since late May – on the NYSE Liffe exchange after the Brussels-based European Cocoa Association European on July 10 reported grind data for the three-month period to June 30 came in at 307,938 tonnes, down 0.7 percent year-on-year. The market had anticipated for volumes to be at least flat.

Cocoa futures in both London and New York have been trading near 3-year highs as recently as last week , supported by concerns that global cocoa production will lag behind demand. Increasingly now more market players and analysts are forecasting a small surplus in world cocoa supply this season (Oct. 1, 2013-Sept. 30, 2014).

Previously a small global deficit had been widely expected in 2013-2014 – and some market watchers are holding on to this expectation. The about-turn follows good rains in West Africa which have boosted output of the region’s mid-crop harvest which typically runs April through September. Previously, a small global deficit had been widely expected in 2013-2014.

Switzerland-headquartered chocolate and cocoa products manufacturing giant Barry Callebaut is the latest player now be to be expecting a slight global deficit this season.

“A good start to the mid-crop cocoa harvest, further helped by record rainfalls in the West African region could turn an expected deficit for the 2013-2014 season into a slight surplus,” Barry Callebaut said in its nine-month sales for fiscal 2013-2014 released late last week.

In June, the International Cocoa Organization in London revised the 75,000-tonne deficit it forecast in May for 2013-2014 to a 30,000-tonne surplus. Analysts and market players are now starting to assess how the global supply/demand balance for the 2014-2015 cocoa year will play out; cocoa production has been widely expected to fall short of demand in 2014-2015.

Cocoa for September delivery on ICE Futures U.S. touched an intra session low of $3,055.50 a tonne on July 10, having settled at $3,089.50 the previous day. On 3 July, ICE September hit $3,149 a tonne, the highest since August 2011, underpinned by the tight supply/demand outlook.

Arabica coffee was largely unchanged, settling at 172.98 cents a pound on ICE Futures U.S. by midweek, and largely flat on last week’s close. Robusta coffee futures on London’s NYSE Liffe finished at $2,056 a tonne at midweek, $29 below the seven-week high of $2,085 a tonne reached on July 3, supported by tightening certified stocks.

Raw sugar futures on ICE slipped to a 4⅟2-month low of 17.16 cents a pound on July 10 on expectations that data from Brazil’s sugar cane industry association, Unica, will confirm a fast cane crush amid dry weather in the second half of June in top producer Brazil’s Center-South region. White, or refined, sugar for August delivery on NYSE Liffe was also lower, finishing at a four-week low of $459.20 a tonne on July 9.

ICE cotton tumbles to two-year lows

Cotton prices on ICE Futures U.S. continue to weaken, tumbling to two-year lows this week, amid improved output prospects for top producer and exporter, the U.S., and expectations of a sharp decline in imports by the biggest consumer, China.

The benchmark December cotton contract on ICE Futures U.S. slipped below the key 70 cents a pound level to a low of 68.51 cents on July 10, the weakest in more than two years. The previous day, December ICE cotton had finished at 69.67 cents. In late March, ICE cotton futures had traded at over 97 cents a pound, their highest level since February 2012, supported by tightening global supplies of the fiber.

But the arrival of rains in the U.S.’ biggest cotton producing state, Texas, in recent weeks after prolonged drought, has led to expectations that the U.S. Department of Agriculture (USDA)in its latest World Agricultural Supply and Demand Estimates Report (Wasde) report on July 11 will raise its forecast for U.S. cotton production for the 2014-2015 crop year which begins Aug. 1.

The country’s cotton growers planted 9.3 percent more acres – some 11.4 million acres – with cotton this spring than they did in 2013, according to the USDA Acreage report released June 30. The U.S. harvested its smallest cotton crop in four years in this current crop year, which ends July 31.

China’s imports of cotton in 2014-2015 are also expected to fall sharply as the country’s government moves to end its cotton stockpiling program and replace it with direct subsidies to farmers.

The stockpiling made it generally cheaper for Chinese mills to import cotton than to buy domestically-produced fiber and has helped to support the global cotton market and prices for the past three years. China as a result now is holding more than half the global cotton inventory. Beijing has indicated the new subsidy system will likely start after the country’s autumn harvest.

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.