Base metals shoot higher in July

Since this post in late June, which pointed to the emerging stabilisation in Chinese economic data, most base and bulk commodities have rallied, while precious metals have been soggy (with the exception of palladium have been weak).  Zinc and aluminium made the strongest gains in the last month.

Its a surprise that zinc and aluminium have run away strongly in the last month or so, while copper and lead have been much more muted.  The latter metals have lower levels of exchange inventory than the former, but it would seem the faster draw in LME inventory of zinc and aluminium is creating a lot of interest.

The outlook for zinc and aluminium is not just about manufacturing demand, but also hinges on the incentives for financing, which has been significant in both metals.

In this context, the increasing likelihood that short term interest rates will start rising in 9-12 months will be important and this will change funding costs for these kinds of deals.

Perhaps strong industrial demand will be able to absorb the unwinding of financing deals, but that will largely hinge on the recent improvement in Chinese data continuing for another 12 months, which is risky.

Bulk commodities were also stronger through the month, although not the to the same degree as base metals.

Iron ore has stabilised in the $95-100/t range and should stay there for a while yet given the steel sector is in better shape than feared given the construction slowdown.  It's tough to be outright bullish on iron ore at this stage, but short term downside is starting to look limited.

API#2 coal prices were a surprisingly good performer, large on the back of short-covering following the escalating situation in Ukraine.  Richards Bay pricing suffered, as Chinese demand has capitulated this summer.  For met coal, its been a case of steady as she goes.

Precious metals have been soggy, with the exception of palladium which has strengthened on the back of decent auto numbers.

This has pushed the Pt:Pd ratio to the lowest levels since the pd short squeeze in 2000.  While this ratio is perhaps testing the limits from a substitution in auto catalysts perspective, that won't be a barrier to further palladium outperformance in the next few months.