Positive economic news, particularly from China, continued to fuel a commodity price revival last week.
Our long held view of sustained robust growth for the Chinese economy remains in place and should continue to favour more industrially-linked metals and energy. Alongside tighter supply conditions for a range of mined commodities, the surprisingly soft US Dollar added to the bullish momentum, despite rising expectations that the Fed will begin tapering its stimulus program.
Even precious metals joined the rally, as some investors remain cautious that a rapid stimulus removal could derail the economic recovery and the broad bull run for equity markets in 2013. Any Fed tapering will be dependent on continued strong data, and will likely be modest to begin with. The Fed needs the US economy to be at a self-sustaining point, something that appears to be still some way off. While buoyant economic activity for China and the US are positive for commodity demand, concern about Eurozone growth lingers despite some recent signs of growth.
ETFS Physical Silver (PHAG) sees the largest inflows on record, totalling US$145mn as economic recovery picks up. Better than expected Chinese industrial production numbers last week likely prompted investors to switch from gold to silver, as the latter tends to benefit in high growth environments. Over 50% of silver demand comes from the industrial sector vs. 10% for gold.
ETFS Aluminium (ALUM) sees record US$54mn of inflows on expectations of Chinese production cuts. Last week, Rio Tinto announced their intention to shutdown the Shawinigan smelter by the end of November. Other producers, particularly in China, are expected to cut production as continued oversupply is harming prices. Although the market is expected to turn into a deficit in 2014 for the first time in since 2004, stockpiles remain abundant. Aluminium inventory levels are up nearly 4% over the past three months, hovering near record highs. ETFS Zinc (ZINC) also received strong inflows, totalling US$5.8mn, on rising demand conditions. At the same time, profit taking drove outflows of US$22mn from ETFS Copper (COPA) last week, as prices rose on the back of better-than-expected Chinese economic data.
ETFS Daily Leveraged Natural Gas (LNGA) inflows surge to two-year highs, totalling US$32mn. Declining natural gas prices appear an attractive entry level despite rising storage levels. At the same time, crude oil ETPs suffered US$12mn of outflows last week, as prices remained under pressure despite the sharp fall in US crude oil stocks and positive Chinese data. Investors accumulated diversified exposures in the energy sector, with ETFS Longer Dated Energy (ENEF) receiving over US$27mn of inflows last week, the second largest inflows on record.
Profit taking prompts US$34mn of outflows from platinum group metals (PGM). PGM prices rose last week as expectations of tighter market conditions prevailed. Both metals have a strong industrial base and a renewed upswing in the Chinese economy would be supportive of demand. China is the world’s biggest auto market and a large consumer of platinum jewellery. Upside potential could also come from South Africa, should negotiations between unions and miners turn heated.
ETFS Daily Short Sugar (SSUG) sees over US$6mn of outflows as investors anticipate price bottom. Sugar prices dropped to the lowest level since June 2010 on anticipated oversupply in global markets. Declining ethanol prices have also contributed to recent sugar price weakness, as producers have been encouraged to convert more sugarcane into sugar instead of biofuels.