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Turning point in metals price sentiment as correlations trend abates

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Turning point in metals price sentiment as correlations trend abates

U.S. economic data released Oct. 6 was at the center of attention last week as Chinese markets paused for the so-called Golden Week holidays.

Treasury debt yields rose after nonfarm payrolls data for September showed a drop by 33,000 jobs. The decline was little surprising as economic figures for the month were expected to be hit the impact of hurricanes Irma and Harvey, which messed with labor market conditions in both Texas and Florida. However, data released earlier that week showed that the two hurricanes bolstered the supplier deliveries index.

There are expectations that construction spending in the December quarter will also jump as both Texas and Florida start rebuilding following the storms.

Metals prices had a rather smooth run last week even though the U.S. dollar strengthened toward the end of the week.

Price ring

Base and bulk metals had fairly good runs, with zinc jumping as much as 4.6% and copper climbing 3.5%. For the latter, it was the biggest weekly increase in more than a month, driven by expectations that a deficit in the market amid strong Chinese appetite will support prices. Copper closed the week at US$6,658/tonne, more than 40% higher than 12 months earlier.

Zinc continued to benefit from warrant availability amid falling warehouse inventories amid subdued output as closures in China continue as part of the country's anti-pollution campaign. Zinc closed at US$3,354/t on Oct. 6.

Aluminum, nickel, lead and iron ore also booked marginal gains. Aluminum finished the week at US$2,124/t, up 0.6%, nickel rose 0.3% to US$10,448/t, lead gained 1.2% to US$2,548/t and iron ore swung up by 0.3% to US$62.2/t.

For precious metals, it was mixed picture. The strengthening dollar weighed on gold, which finished the week 0.4% in the red at US$1,275/ounce, while silver shifted 1.1% higher to US$16.8/oz.

Talking points

Fundamentals are again becoming the main driver for metals prices, while correlations among metals prices are on the decline amid "discriminating" investor sentiment for commodity index funds, according to a report by Macquarie Research.

"Correlation among metals prices has resumed its medium-term decline after a short spike higher, something we attribute to less broad-brush commodity investment and fewer global macroeconomic shocks," the team wrote in an Oct. 5 note. "We think the more benign global economic environment will see this trend continue, making a focus on supply/demand fundamentals ever more crucial."

From around 2005, metals prices increasingly rose and fell together, attributed largely to the "financialization" of commodities and growing popularity of commodity index funds. The vehicles allowed investors to buy commodities and metals as a collective asset class.

"At the same time there were increased symmetrical shocks, such as the economic rise of China, which increased demand for metals across the board," the analysts said. "And lower interest rates and QE meant globally all assets were being driven by liquidity flows."

Macquarie said global macro shocks to markets have continued to lessen in recent years, facilitating a slow but robust global economic recovery and strong but stable Chinese demand.

Equally, from mid-2012, correlation between metals prices started to decline, reaching a more than ten-year low in August 2015. According to Macquarie, correlation trends are now close the lows seen in 2015 and linked to a drop in "financialization" of the sector.

"Investment in commodities fell on the back of disappointing returns. This trend has perhaps played out, but we think investors continue to become more discriminate, with fewer funds flowing into aggregate indices."

Amid abating correlation trends and macro forces, Macquarie expects micro forces to become more relevant for metals prices, such as increased government intervention in mining and trade or the potential impact of electric vehicles.

The analysts said, "This is hard to prove — metal prices have always been affected by specific factors — but even if these have not in absolute terms become more important, our point is that they will be relatively more important."

Financings

United Co. Rusal Plc's 48.1% owner, En+ Group Ltd., is looking at an initial public offering of global depositary receipts to raise about US$1.5 billion to partially repay its debt. The admission to the London Stock Exchange is expected to take place in November, followed by an admission to the Moscow Exchange.

Glencore Plc and its partners in the Queensland, Australia-based Wiggins Island Coal Export Terminal seek to partially repay US$3 billion of debt ahead of a fast-approaching full repayment deadline. In the event a refinancing fails to materialize by September 2018, the loan terms call for Glencore and four other partners in the terminal to pay the loan in full over the next 10 years.

East Africa Metals Inc. signed a binding memorandum of understanding with Luck Winner Investment Ltd. for project development financing of up to US$250 million to be spent on the company's Ethiopian projects. Luck Winner also committed to purchase via a private placement 52.1 million units of the company at 26 Canadian cents apiece for approximately C$13.6 million in proceeds, which will be used for exploration programs.

Australian private equity player EMR Capital completed a US$560 million refinancing of the Martabe gold-silver mine in Indonesia, which it acquired from G-Resources Group Ltd. in March 2016. According to Managing Director and CEO Jason Chang, the company paid down much of an existing loan, which was refinanced on terms suited toward the operations.