There was an article in the Australian this weekend about Chinese coking coal mine restarts.  Met coal prices are on the rise, and the Chinese are not going to pay through the nose what they can produce locally.  The mines were closed mostly for their environmental and worker safety record.   I have no doubt that if the price is high enough they will find ways of either improving such records, or turning a blind eye to it.

What is notable is that it is the first article I've read of the kind.  Its not much to worry about yet.  Still, one must remember that all that is commodities is fleeting, and be wary of the signs of the turn.

If there is one thing that the crisis has taught, it is that even in a secular bull market, commodity markets will get killed when the tide turns.  This fact has been proven again and again, by first nickel, then zinc, then oil and copper for a time, and now the grains of late.  That is why I do these weekly posts; to examine the near term conditions and look for turns.  It is too early to call a turn in coking coal, but stories of mine restarts are harbingers of such a turn.

Coking Coal

• ”A combination of steel markets stabilising, the destocking phase at steel mills ending, and the emergence of new markets for metallurgical coal, has led to a more positive outlook for the metallurgical coal market over the next few months,” the company said. - Macarthur Coal July 27
• Macarthur Coal has cautiously signalled better times for coking coal producers, saying European demand has begun to return to a market already buoyed by surprise demand from China...European steel mills, hit hardest by the global slump, were providing a big portion of the increase in demand, Ian McAleese, Macarthur's general manager of corporate development, said yesterday. - The Australian July 27
• Among the quantity, the proportion of imports of coking coal has become increasingly high. Statistics from the customs indicate China imported in H1 12.89 million tonnes of coking coal, rising by 3.4 times YoY and taking up 26.7% of the total import volume. In June, imports of coking coal exceeded all historically recorded levels, reaching 463 million tonnes increasing by about 7 times YoY - Mysteel.net July 27

• The lack of clarity about how many sites could restart, and when, has meant that miners have been employing temporary staff rather than restarting production for good...There is doubt about how long Chinese mines will stay shut if coking coal prices keep rising..."I say don't listen to what they (China) tell you, listen to what they do," said a marketer at one of the nation's big coal miners..."About four years ago they told us they were going to be a big market for imports, but domestic production caught up to steel production (when prices rose)."...Again this time, while blast furnaces are returning, so are reports of Chinese mine restarts.  Last month a number of small mines in Shanxi province reportedly restarted after meeting safety requirements. - The Australian Aug 1

Steel

• Sentiment within the Indian steel industry is still mixed. Flat product steelmakers are once again bullish after an upturn in local sales volumes. Domestic offers for flat rolled material have risen on average by Rs500-1,000 per tonne. The pick up in steel usage from automobiles and white goods manufacturers continued this month. In contrast, effective prices for long products are starting to weaken. The country is now entering a period of low seasonal demand. - MEPS July 27
• The Brazilian steel market has entered a period of calm. Prices are exhibiting more stability and there are signs of month-on-month incremental improvements in real demand. Fiscal measures are improving demand for flat rolled material but more needs to done to assist the long product segments. Nonetheless confidence amongst steelmakers is on the mend. - MEPS July 27

• There are signs the destocking cycle has ended in the North American and Central European steel markets, and increased customer orders across almost all industry segments have resulted in an extension of lead time. We have began to bring up idle facilities inline with customer demand, and we have implemented price increases in our Flat-rolled and USSE segments in the third quarter...Despite these times of improvement, the outlook for overall demand remains uncertain and the timing and magnitude of sustained economic recovery remains difficult to forecast.- US Steel July 27

• Dave Lerman, CEO of South Bend, Ind.-based Steel Warehouse Co., said inventories had been reduced to "even slightly uncomfortably low levels" in the industry. "This uptick we've seen in the steel business is an attempt to start buying at least at the level of sales."...Mr. Lerman, whose firm sells steel to manufacturers, has slashed his stockpiles of steel by 50% from last year, when he was caught with too much inventory as the commodity boom quickly turned to bust. Lately, he has seen business improve. One sign: Steel mills are starting to take longer to make delivery on his orders. - WSJ Aug 1

• A recovery in the stainless steel sector is underway. World steel production in the second half of this year will be significantly higher than in the first six months. The Asian market has started to pick up. Destocking is coming to an end in most western nations and inventory rebuilding has commenced. We should point out that this revival is from a very low base...MEPS forecasts global crude stainless steel production at 21.6 million tonnes in 2009. This equates to a 16.7 percent reduction on the previous year's outturn and a 23.5 percent decrease on the peak value in 2007. - MEPS Aug 1

• Demand on the EU mills has picked up in recent months. Rising nickel costs have prompted end users and distributors to begin to place orders, as stainless steel selling values show signs of further increases... Japanese output collapsed in the first trimester. We do, however, detect a pick up in consumption from the automotive and IT sectors. The main steelmakers have indicated that they will increase production to meet the requirements of the market over the next few months...South Korean activity is likely to remain relatively slow. A modest improvement in production is anticipated in the second half of the year but from an extremely low point in the first quarter. In contrast, the Taiwanese market has picked up as a result of government stimulus measures. The two major producers have increased output...Real demand in the United States remains at a low level...Chinese demand and production rose in the first trimester as the producers lifted their operating rates to near maximum capacity. We believe that oversupply will develop in the coming months and a slowdown in orders will take place. - MEPS Aug 1

Copper

• “China’s copper imports are likely to fall in the second half of this year because it bought so much in the first half, the government has stopped buying and demand from end-users may not be as big as people anticipated,” said Zhao Mingwang, manager of futures trading at Zhuji, China-based Zhejiang Honglei Copper Co., which produces about 100,000 tons of wires and rods a year. “The imports were so large it’s hard to fathom where it all went.”  - Bloomberg July 27
• China’s scrap-copper imports tumbled 18 percent in May and 15 percent in June after rising for three months, government data show.- Bloomberg July 27
• Purchases may falter this quarter as government stockpiling slows and after record volumes boosted inventories before the seasonally slow summer, UBS AG said. Imports may drop to 100,000 tons a month in July through December, from an average of 280,000 tons in the first five months, analysts for the Zurich- based bank said in a July 6 report.- Bloomberg July 27
• “Stockpiling by the State Reserve Bureau led to record levels of refined copper imports in the first half, and economic recovery will keep imports at similarly high levels for the rest of the year,” said Ma Xiaoxin, deputy general manager of Beijing-based China Minmetals Nonferrous Metals Co.’s copper department. Prices should mostly stay above $5,000 a ton ($2.27 a pound) until December, Ma said.- Bloomberg July 27
• Chilean copper production fell 2.6% on the year in June to 467,185 metric tons from 479,424 tons in the same month of 2008, government statistics agency INE reported Thursday. January-June output dropped 4.1% to 2,589,272 tons from 2,699,277 tons during the first six months of last year. In 2008, Chile produced 5,364,159 tons, a 4.2% drop from the previous year. - Dow Jones July 30
• Antofagasta Plc, the copper producer controlled by Chile's Luksic family, posted an 11 percent drop in second-quarter output after its plants processed harder ore. Production dropped to 106,300 metric tons, the London-based company said today in a statement. It mined 119,000 tons a year earlier. - Bloomberg July 31

• Yesterday's sell-off provoked decent gold demand from our Indian clients, with our sales matching the best that we have seen in 2009: in volume terms, yesterdays' sales were about a quarter of the peak seen in August 2008. But strong demand should not be a surprise, considering the magnitude of the two-day sell-off as resting orders were filled. It will be more important to see whether these orders are replaced at market prices now that gold has steadied. Our Zurich sales desk reports that enquiries are limited and turnover slow today, with orders being placed at $925 and below. We need to see a period of sustained strong Indian demand to start thinking about calling a strong support in gold, and we suspect that this will only be seen at lower prices or in a month or so.- UBS July 30
• The planned sale of 403 tonnes of IMF gold will take place within a new European central bank gold pact currently being negotiated, a senior International Monetary Fund official said on Wednesday. - Reuters July 30

• China consumed 33.35 million metric tons of crude oil in June, which was up nearly 2.6% from the corresponding month of 2008, and the third month in a row to register a year-on-year increase in demand, a Platts analysis of official data showed July 22...Collective crude oil throughput at Chinese refineries rose to a new high of 31.92 million metric tons in June, or an average of 7.8 million barrels per day, dwarfing the previous record of 31.19 million metric tons processed in May.  - Platts July 24
• [The IEA predicts that] worldwide consumption of crude oil will increase by 1.4 million barrels a day, or 1.7 percent, to 85.2 million barrels a day next year, the adviser said in its first monthly report to include a forecast for 2010. The growth will be concentrated in emerging economies outside the Organization for Economic Cooperation and Development.  The agency revised up its assessments of 2008 and 2009 global demand by 400,000 barrels a day each, to 86.2 million barrels a day and 83.8 million a day, respectively.  Daily supplies from outside the Organization of Petroleum Exporting Countries will increase by 410,000 barrels to 51.2 million barrels next year as a result of projects in Azerbaijan, Brazil and Canada, as well as growing use of biofuels, the agency said. Non-OPEC nations account for about 60 percent of world oil output. The anticipated supply increase may be canceled if the recession persists, the agency said.  - Bloomberg July 10

• The per capita consumption spending volume of Chinese urban residents stood at 5,979 yuan ($875) in the first half of this year, up 8.9 percent year-on-year, the National Bureau of Statistics (NBS) announced Monday...Deducting price factors, the growth reached 10.3 percent...The per capita disposable income of Chinese city dwellers rose 9.8 percent year-on-year to 8,856 yuan in the first six months. Deducting price factors, the increase reached 11.2 percent, said the NBS. - China Daily July 27

• We have been and remain long-term commodity bulls, but over the near-term, caution may be the watchword.  

  The reason for this is because China is the key demand-driver for the group and Steve Roach pens a fascinating but disturbing assessment on page 22 of the FT after years of being rather bullish (see  I’ve Been an Optimist on China. But I’m Starting to Worry). Basically, what it boils down to is short-term-ism in the fiscal stimulus package, which has re-engineered a credit bubble (bank loan growth is running at a record pace over the past six months and is three times the pace of a year ago) and the public sector capex drive has accounted for 88% of Chinese GDP growth so far this year (double the contribution over the past decade) — this is clearly unsustainable. According to Mr. Roach,

  China accounted for an amazing two percentage points of global GDP growth in the second quarter, which helps explain the export bounce in the rest of the continent. Unless private sector investment and personal consumption begin to take over, the prospect of a reversal is not trivial. - David Rosenberg July 28

• China’s manufacturing expanded for a fifth month as record lending and a 4 trillion yuan ($586 billion) stimulus plan drove a recovery in the world’s fastest- growing major economy...The official Purchasing Managers’ Index rose to a seasonally adjusted 53.3 in July from 53.2 in June, the Federation of Logistics and Purchasing said today in Beijing in an e-mailed statement. A reading above 50 indicates an expansion.  - Bloomberg July 30

• In Guangdong, a manufacturing hub on the nation’s east coast, exports are recovering, the official Xinhua News Agency said July 20, citing the provincial trade bureau. They may return to growth in the fourth quarter, the bureau said...Wang, the economist from UBS, said she expects the same for the exports of the nation as a whole as global demand recovers. South Korea reported today that its exports fell for a ninth month in July from a year earlier.  - Bloomberg July 30

US Economy

• The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows...The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession. WSJ July 27
• The US Industrial economy continued its rapid rise out of recession last week (If pipeline scheduling is correct), as gas-flow delivery scheduling on US pipelines continued to ramp...The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) advanced for its 8th week in a row, and is now at its highest point since March 21st.  In its dailies (as evidenced by the "Part 7" industrial daily posts on the IV-CWEI site) it was red-hot all week.

  The recent pattern of ongoing upward-revisions to previous estimates also bullishly continued (as facilities have to adjust to the quick ramp-up in implied productive demand). - Robry825 Economic Assessment July 27

• I continue to believe the industrial-recession ended at the May-28th Production-Index bottom, and anticipate a turning in the employment numbers in the month(s) ahead.  With the implied inventory overhang now gone, and production lagging consumption by a wide margin, I believe the recovery has (to borrow a term from nuclear physics) reached its point of critical mass.  As long as consumption holds at current levels, production should ramp up very quickly to meet it. - Robry825 Economic Assessment July 27
• The average junk-rated company is now no longer "distressed," meaning yields have fallen to less than 10 percentage points above the benchmark Treasury bond. Yields on higher-quality companies also are dramatically lower as investors feel less leery about corporate debt. As yields fall, bond prices rise...Meanwhile, the spread between investment-grade bond yields and Treasurys has been halved to about three percentage points, according to Merrill Lynch. High-yield spreads are down sharply from their all-time high of 21.8 percentage points in December. Total yields on junk bonds average about 12.3%, above their 10-year average of 10.7%, Merrill calculates. - WSJ July 27
• “While I am hopeful that the worst is behind us, I just don’t see anything on the economic horizon that suggests freight tonnage is about to rise significantly or consistently,” Costello said. “The consumer is still facing too many headwinds, including employment losses, tight credit, and falling home values, to name a few, that will make it very difficult for household spending to jump in the near term.” - Bob Costello American Trucking Association
• Compared with June 2008, tonnage fell 13.6 percent, which surpassed May’s 11 percent year-over-year drop. June’s contraction was the largest year-over-year decrease of the current cycle, exceeding the 13.2 percent drop in April. - Bob Costello American Trucking Association

• The details in today’s report left something to be desired. Consumer spending came in at -1.2% annualized, twice the decline expected by the consensus. This occurred in the face of gargantuan fiscal stimulus and leaves wondering how this critical 70% chunk of the economy is going to perform as the cash-flow boost from Uncle Sam’s generosity recedes in the second half of the year. Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? ?- David Rosenberg July 30

• Nonresidential construction action sagged at an 8.9% annual rate and this was on top of a 44.0% detonation in the first quarter. Ditto for equipment & software ‘capex’ spending, also down at a 9.0% annual rate and this too followed a 36.0% collapse in the first quarter. Residential construction slumped sharply yet again, this time at a 29.0% annual rate. These are the guts of private sector spending and collectively, they contracted at a 3.3% annual rate — the sixth decline in a row. ?- David Rosenberg July 30

• we can see from the University of Michigan and Conference Board surveys that homebuying intentions are rolling over again. Mortgage applications for new home purchases were flat in the July 24th week and have declined fractionally over the month. - David Rosenberg July 28

• The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 119.6 in the week ended July 24 from a downwardly revised 118.3 the previous week, which was originally reported at 118.4. - Reuters July 30

• Most importantly, the U.S. Leading Home Price Index (USLHPI), designed to predict cyclical turns in real home prices, has now been rising for five months… But a three P’s analysis (see chart below) of the level of the USLHPI reveals an even more promising picture… the recent upturn in the USLHPI is almost as pronounced as the median in comparable past cycles… it is almost as pervasive; and … it is just as persistent. The implication is clear: this is a genuine cyclical upturn in the level of the USLHPI. Such an upturn in the USLHPI amounts to a forecast of a cyclical upturn in the level of home prices this year…"  - BusinessCycle.com July 30
• The Association of American Railways today reported that railcar loadings for the week ending July 25, 2009, continue to show a slight improvement but rail traffic continues to remain down compared to the same period last year.US Railroads reported originating 273,943 cars, down 17.4% compared with last week in 2008.