The Ukrainian crisis remained in focus last week, with the European Union joining the US in imposing sanctions against Russia. Concerns that Russia may face trade restrictions drove strong inflows into palladium ETPs last week….
ETF Securities Research
as Russia accounts for over 40% of global production of the metal and a deficit is already foreseen in 2014. Gold sold off following more hawkish than expected comments from new Fed Chairman Janet Yellen, though ETP investors held firm. While fears of a slowdown in China continued to weigh on industrial metals last week, heating oil and sugar attracted tactical allocations by investors.
ETFS Physical Palladium (PHPD) receives the biggest inflows in almost a year, totalling US$68mn, on supply restriction fears. Russia is the world’s biggest producer of palladium, with 42% of supply coming from the country. Any restrictions on Russian palladium exports would exacerbate what is already expected to be a large palladium deficit in 2014. At the same time, South African strikes are entering their 9th week and no industry-wide resolution has been found yet. While Amplats signed an agreement with the National Union of Metalworkers of South Africa (NUMSA) on Thursday, the Association of Mineworkers and Construction Union (AMCU), by far the largest union at Amplats’ operations, is still on strike. South Africa is the 2nd biggest producer of palladium with 37% of global production and the largest producer of platinum.
ETFS Daily Short Heating Oil (SHEA) sees US$9mn of inflows as cold weather in the US subsides. At the same time, investors are becoming increasingly negative Brent oil, with long Brent ETPs seeing US$2.6mn of outflows last week. We expect the WTI-Brent crude spread to continue narrowing as the upcoming US driving season boosts US oil demand, in turn lifting the WTI price while a reduction in the geopolitical risk premium puts downward pressure on Brent.
Supply glut prompts US$33mn of outflows from long aluminium ETPs. The aluminium market has been in a surplus for the past 9 years, according to the World Metal Bulletin Statistics (WMBS) and consensus is that this trend might continue into 2014. Although Russia is the 2nd biggest producer of aluminium, with 9% of primary supply coming from the country (as of 2012), abundant supply and elevated stockpiles have so far prevented the price from rising despite the increased risk of trade sanctions against Russia. At the same time, profit taking drove US$3.6mn out of long nickel ETPs, as the price has jumped over 10% in the past month. Supply constraints in Indonesia and potentially Russia are likely to continue support prices in the near-term.
Long Arabica coffee ETPs see another week of outflows as price drops on improving weather conditions in Brazil. Rainfall is expected over the next few days in Brazil’s top producing state and it is likely to improve crop conditions. Earlier in the year, the price of Arabica coffee jumped to a 2-year high on drought conditions in Minas Gerais, Brazil, where the rainfall deficit in Jan/Feb was the worst since at least 1950. Since then, prices have plummeted 15% as rain has resumed in key growing areas. With weather conditions changing and the potential for an El-Nino weather event to boost supply in coming months, we expect prices to decline back to recent support levels around 1.55 per pound. Meanwhile, investors are increasingly becoming negative on sugar, with ETFS Daily Short Sugar (SSUG) receiving US$2.1mn, on a better Brazil crop outlook following rain in Brazil..
Key events to watch this week. US Markit manufacturing PMI, retail sales and Q4 GDP data will also be watched closely to gauge the strength of the US recovery and the pace of Fed tapering.