Iron ore closes in on USD150/t amid strong demand from China

Commodity markets struggled amid a stronger USD and diminishing hopes of a US stimulus package. This saw the ANZ China Commodity Index end the session down 0.1%. Precious metals led the complex lower, with gold falling sharply amid the weak investor appetite. Silver and platinum were also weaker. Bulk commodities were a touch weaker, with gains in iron ore offset by a fall in coking coal. Energy inched higher, with gains in LNG and thermal coal, while crude oil was flat. Falls in cotton and hogs weighed on the agriculture sector.

Crude oil suffered a rollercoaster ride, hit by both supply and demand issues. Prices were under pressure early in the session after US inventories rose more than expected. Commercial stockpiles rose by 15,189kbbl last week, according to EIA data. Most of the build was in the Gulf Coast, largely caused by a record decline in exports. Rising cases of COVID-19 continues to weigh on gasoline demand, with inventories rising by 4,221kbbl. This saw implied demand of gasoline fall to a six-month low of 7.6mb/d, according to EIA data. Prices subsequently rebounded after Iraq militants attacked two wells. While the wells were small, it has raised concerns of further disruptions. Sentiment continues to be supported by development of COVID-19 vaccines. Canada was the latest country to approve a vaccine, and is expecting to receive its first batch next week. The market continues to look past the short-term headwinds created by the virus in Europe and US, with Brent’s curve moving back into backwardation. Robust demand from Asia is also supporting sentiment.

North Asia LNG prices continued on its merry way towards USD9/mmbtu. The recent rally appears to be driven by India, with demand returning to pre-COVID levels, thus increasing the need for prompt LNG supplies. This comes as the market is experiencing several supply disruptions. Issues at Wheatstone and Ichthys remain unresolved, while Qatar and Trinidad & Tabago have also had problems. And despite booming US LNG exports, congestion in the Panama Canal has reduce the number of ships available for prompt delivery. This has forced trading houses and portfolio players to cover their short positions. This saw prices push higher, with January contract extended recent gains, rising 1.6% to USD7.82/mmbtu. However, all the interest remains in the February contract which rose 7.5% to USD8.600/mmbtu.

Iron ore futures gained amid expectations of strong demand continuing in China. Danny Goeman, director of sales and marketing at Fortescue Metals Group, said that a strong v-shaped recovery in China has occurred as a result of government stimulus measures. He expects this momentum to provide ongoing support for steel demand in 2021. Credit growth has fuelled the rise in investment in infrastructure and housing. However, data released yesterday showed its growth eased slightly in November. Aggregate financing hit CNY2.13trn, while new loans by financial institutions were CNY1.43trn.

Zinc led the base metals higher, amid concerns over supply. The metal rallied to its highest level since April 2019 after data showed Chinese production fell to 562kt in November, down by 6.9kt in October. Production is expected to fall further, as falling processing fees hit margins at smelters, forcing some to close. This follows from last month’s closure of the Gamsberg mine in South Africa. Treatment charges are at their lowest level in more than two years, indicating a tight zinc concentrate market. Copper was also higher, as the continued strength in the economic recovery in China boosts sentiment.

Gold prices tumbled as hopes of a US stimulus package faded amid ongoing disagreement between US lawmakers. The latest stumbling block is differences over a business liability shield and aid to state governments. The stronger USD also weighed on investor appetite.