There were some positive comments out of K+S this week, one of the potash producers who has in the past most vocally negative.  K+S, you will remember, was the first potash producer to cave in on price, reducing their price to European customers from $750/t to $600/t back in April.  Norbert Steiner, the CEO of K+S, believes that demand will pick up in 2010, and also noted that distributor inventories are empty in Europe and near empty in the US.

I have stayed away from the fertilizer stocks since May, and that has, so far, proven to be a good strategy.  But the time will come.  You can look the current grain situation, and its impact on fertilizer demand, in two ways.  On the one hand, farmers will likely have good cash returns from the enormous yields they are pulling in, ergo lots of free cash to buy fertilizer next year.  But looked at another way, the high yields this year were achieved without much potash application.  You have to wonder if there isn't going to be some questioning of the need for nutrients given the performance without them this year.

The US economy appears to still be trucking along at the speed of a 5th wheel, though the leading indicators such as the WLI are still predicting an extremely strong recovery.   I am more curious then anything to see how this is going to play itself out.  You have remain skeptical of too much strength under the weight of the debtload that the US has and the job losses that are still occuring, yet the leading indicators are defined as thus because they have consistently predicted recovery in the past. 

I don't usually post much in the way of base metal inventory data in the blog bytes, but this quarters nickel supply/demand balance, posted below, really highlights the bearish arguments for the base metals.  Nickel has been in a pretty severe surplus the past 6 months, and the pick up in demand over the 2nd quarter was almost wholely matched by an increase in supply. 

I keep waffling back and forth on the metals.  I have owned FNX since early April, and have bought and sold Capstone, Quadra, and Taseko on more then one occasion over the past 4 months, but I just haven't been able to bring myself to make a really large bet on copper or nickel given the supply/demand dynamics that I can see.

If I could see copper inventories deacreasing on a regular basis I would have no qualms about taking the 25% cash position that I have and putting it to work in the above copper stocks.  But with copper, like nickel, seeing increasing builds on a daily basis, its hard to justify the risk. 

With Met Coal back in March and April, there was evidence that commodity was turning and that the stocks weren't pricing that in, and so I was able to make a large bet on WTN, GCE, and TCK.  That is what has been responsible for the large gains I've had this year.  I'd like to do the same with copper and nickel, and if you looked only at the price of the commodities ($2.80 copper and $8 nickel) you would say that the stocks are no where near pricing in the current prices of the commodities, and it would seem a no brainer to invest large sums that they would catch up.  But the inventories that are piling up really through a question mark into the equation.  Right now FNX and TKO make up about 15% of my portfolio, mostly because I have a double in FNX since I bought it in April.  I am reluctant to make that exposure any larger until I see some draws on inventory.

Anyways, here is this week's bytes:

Coking Coal

• Merriman Curhan Ford analyst says, "In our opinion, record Chinese steel production will likely lead to higher met coal prices in 2010. Chinese steel production was a record breaking 51M tonnes in July, marking the second month in a row that the industry operated at what we estimate is close to full capacity. Strong Chinese demand has driven spot met coal prices higher, and we feel comfortable moving our 2010 international settlement price forecast to $150 per tonne from $120 per tonne... - theStreet.com Sept 1
• Currently, domestic ex-works prices of washed coking coal have stabilized in the range of Yuan 1,150-1,250/mt ($168-183/mt, free carrier, including 17% VAT) in the past month. This is despite market speculation that coking coal prices may soften in line with local coke prices following a correction in the local steel sector. - Macor Shipping Sept 4
  

Steel

• On a sector-by-sector basis (see part "8" posts on the IV-CWEI site) the steel sector (which led the other groups to the downside with a 75% drop in scheduling) continues to lead on the upside and has nearly tripled (up nearly 175%) since its worst month ever (June).  The auto sector again continued to back-peddle (in spite of the much talked of "Cash for clunkers" activity). - Robry Economic Assessment Aug 31
• Steel prices in the U.S. rose 10 percent in August because of increased purchases from distributors...Overall, demand for steel remains "wobbly" and is largely confined to distributors, known as service centers, Purchasing Magazine said today. "The market is not robust and most sales are being made to service centers rather than manufacturing firms," Purchasing said. - Bloomberg Sept 1
• Baoshan Iron and Steel Company, China's largest steel maker, says that it expects steel prices to recover from recent declines because of increasing demand from manufacturers. There was "healthy" demand and the global economy was on the path of recovery after its "most difficult period", Baoshan president Ma Guoqiang said yesterday. Benchmark Chinese steel prices have dropped 13% since August 4 after gains this year led buyers to run down stocks. Baoshan Steel's profit would rise "significantly" in the second half from the first six months as demand and prices recovered, vicepresident Chen Ying said. "The most difficult period for the world economy has gone," Ma said. "The economy will recover next year, although the pace won't be fast."  The company is running at full capacity utilisation, Ma said. Baoshan plans to raise output of stainless steel "moderately" in the second half, Chen said. - All Africa Sept 1
  

Nickel

• Namely, 563,700 tons of nickel were consumed in the world for the first half of 2009, having had a substantial decrease of 18.6% compared with that (692,300 tons) for the same period of 2008. However, as regards the second quarter (April - June) of 2009, 305,000 tons of nickel were consumed in the world for this quarter as increased by 17.7% compared to that (258,700 tons) for the preceding quarter of January - March of 2009. Accordingly, the global situation on supply and demand of nickel in the first half of 2009 had an improvement and got away from the worst time. – INSG Sept 2
• Reflecting a crisis of the world economy, stainless steel mills had been driven to reduce considerably their production of stainless steel in the first half of 2009 and this matter was the main factor for a substantial decline of nickel consumption in the world. However, the world consumption of nickel in the second quarter of 2009 had improved to a remarkable extent and, in comparison with nickel consumption in the first quarter (January - March) of 2009, the consumption in the second quarter had recovered in every country of the world. While most of the world countries decreased their nickel consumption, China consumed 185,000 tons of nickel in the first half of 2009 and was only the country in the world, having increased nickel consumption by 7.8% compared to that in the same period of 2008. It is anticipated that China will also increase further their nickel consumption in the second half of 2009, because the output of crude stainless steel in China for the calendar year (January - December) of 2009 is forecasted to exceed a level of 8.00 million tons per annum. – INSG Sept 2
• The world production of nickel in the first half of 2009 was 662,100 tons, having decreased by 7.2% compared with that (713,400 tons) in the same period of 2008, and this reduction in nickel production was due to the fact that, by taking into account of the decreased demand for nickel, major producers had curtailed their nickel production. However, as far as the second quarter (April - June) of 2009 is concerned, the world output of nickel in this quarter was 341,200 tons as increased by 6.3% from that (320,900 tons) in the first quarter (January - March) of 2009. – INSG Sept 2

Oil

• China’s latest trade data (July 2009) suggest a continuing trend of improving domestic demand across a broad range of commodities. Its apparent demand for oil continues to grow at a fairly robust pace. Refinery output is soaring. Oil demand in July was above 8 million barrels a day, up 4.5 per cent from a very high base of July 2008...Crude oil imports were close to 42 per cent year-on-year, while refinery runs were up 9.2 per cent...Diesel production has reached an all-time high and the country remains a net diesel exporter...Chinese oil data for July confirm that a strong demand recovery remains firmly in place, commented Barclays Capital in a report. - Hindu Business Line Aug 31
• While there has been significant talk about a base-metal inventory buildup in China, there hasn’t been much chatter on a similar oil inventory buildup. Credit Suisse notes that China’s apparent demand (imports plus production less exports) is running significantly above trend for many key commodity products. They see the same pattern in crude oil, polyethylene, asphalt and metals. Economic growth, on the other hand, while improving, is below trend. The brokerage sees this not only in oil imports, polyethylene (PE) and asphalt, but also in other commodities, suggesting a consistent pattern and pointing to inventory build. - Canaccord Sept 4
  

Potash

• K+S AG predicted a 50 percent jump in potash sales in 2010 as global demand for the crop nutrient rebounds from this year’s slump...Europe’s biggest potash producer may boost sales to “slightly more” than 6 million tons, up from a predicted 4 million tons this year, when farmers in markets such as China refrained from ordering, Chief Executive Officer Norbert Steiner said in an interview. - Bloomberg Sept 1
• North American potash distributors have some inventory left, yet stockpiles in Europe are all used up, Steiner said. Global demand will climb to a record 60 million tons by 2013 at the latest, the CEO added. - Bloomberg Sept 1
• "Given the number of [existing mine] expansions expected to come online over the next five to eight years, from a pure demand perspective future production from a large-scale greenfield potash project will likely not be necessary until post 2020," he said.- Globe and Mail...While eight projects are considered to have advanced beyond the conceptual stage, only Brazil's Vale SA mine in Argentina and Canada's MagIndustries Corp.'s Republic of Congo mines are expected to proceed in the next year. - Sept 2
• The potash market remains quiet as major buyers China, the U.S., and Southeast Asia remain on the sidelines. China is playing a smaller poker game, as near-term supplies appear sufficient to defer serious contract discussions. Only China knows at which point its comfort level of inventories will be reached, and its bargaining power diminished. We assume China will look to settle with Silvinit, as the perceived weakest producer. The first tonnes of potash have begun shipping to India under the contracts that were signed in July. Canpotex is scheduled to deliver 149k of the 661k tonnes potash expected between August 1st and September 10th. - CC Sept 1
  

Agriculture

• From June’s all-time record of 4.7 million tonnes soybean imports, July figure was slightly lower at 4.4 million tonnes, yet the second highest on record. Total imports year to date were 26.5 million tonnes, up 28per cent year on year...China’s robust import demand for soybean partly explains the rally in soybean prices in recent months. Burgeoning livestock industry demand and domestic output constraints are seen driving import demand up. - Hindu Business Line Aug 31
• Turning to world figures, despite the problematic nature of this year’s Monsoons, India's wheat inventories are quite high, unlike her inventories of sugar. Wheat
  inventories recently were 33 million tonnes, nearly twice what is normal for India in the past several years at this time of the year while her rice inventories are
  19.6 million tonnes, also double her normal 9.8 million. Government officials in Delhi have told the market that India’s combined grain inventories are sufficient to
  meet 13 months of local demand. Things there do not become problematic until that number falls to 8 months or less. Barring some truly unforeseen problems, it will not be there this crop year and all things being equal, this is manifestly bearish of wheat. - TGL Sept 1
  

Gold

• Probably the most interesting of the recent reports of what is happening with Chinese sovereign wealth fund investment outside China has come from Paul Mylchreest's Thunder Road Report where an ex-U.S. intelligence service member is quoted.  He reports that he has a friend who is in the Chinese Sovereign Wealth fund sector who says - hearsay I know and it wouldn't stand up in court - indicated  that  the wealth fund analysts were working all hours of the day and night trying to put investment deals together - particularly in the oil and precious metals sectors.  The conclusion is that China recognises that the U.S. dollar is going to tank and it wants to convert as much of its trillions of dollars of holdings into strategic assets as possible before the collapse really takes hold. – Mineweb Sept 2

US Economy

• A big week last week... The US industrial economy resumed its advance following its one-week pause the previous week (If pipeline scheduling is correct)... racking up its 12th advance in the last 13-weeks as the US continues to fight its way out of recession...The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) now stands higher than at any time since January 14th (It bottomed May 28th), and at levels suggesting it has made up better than 50% of it's recessionary deficit.  In its dailies (as evidenced by the "Part 7" industrial daily posts on the IV-CWEI site) the week was red-hot, starting off strong and gaining further strength as the week progressed. - Robry Economic Assessment Aug 31
• The Paperboard-based Consumption Index also advanced nicely for the week (though still off from its all-time high of six weeks ago).  The Consumption Index is now below year-ago levels (which benefited from a bit of political-convention euphoria... right before the bottom fell out of everything).  In its dailies, it appeared strong all week. - Robry Economic Assessment Aug 31
• Yields on corporate bonds relative to U.S. Treasury benchmarks have sunk to levels unseen since before the collapse of Lehman Brothers Holdings Inc. in September, a positive sign for credit markets. Spreads on junk bonds fell in July to within 10 percentage points of Treasuries, lifting them out of the distressed category for the first time in almost a year. - Bloomberg Sept 1
• The Chicago Purchasing Manager’s report was a good deal stronger yesterday than the market had been expecting, coming in at 50… spot on the supposed “Boom/Bush" figure, below which the economy is weakening and above which it is strengthening. The trend has been upward for months now, and that is consistent with our thesis that the recession ended sometime in this quarter, awaiting only “The Word” from the NBER at some point in the future. - TGL Sept 1
• The Pending Home Sales Index, a forward-looking indicator based on contracts signed in July, increased 3.2 percent to 97.6 from a reading of 94.6 in June, and is 12.0 percent higher than July 2008 when it was 87.1. The index is at the highest level since June 2007 when it was 100.7....NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.  - NAR Sept 1
• In the week ending Aug. 29, the advance figure for seasonally adjusted initial claims was 570,000, a decrease of 4,000 from the previous week's revised figure of 574,000. The 4-week moving average was 571,250, an increase of 4,000 from the previous week's revised average of 567,250...The advance number for seasonally adjusted insured unemployment during the week ending Aug. 22 was 6,234,000, an increase of 92,000 from the preceding week's revised level of 6,142,000. - DOL Sept 3
  It seem that weekly claims are stuck at a very high level; weekly claims have been around 570,000 for the last 8 weeks. This indicates continuing weakness in the job market. The four-week average of initial weekly claims will probably have to fall below 400,000 before the total employment stops falling. - CalculatedRisk Sept 2
• The NMI (Non-Manufacturing Index) registered 48.4 percent in August, 2 percentage points higher than the 46.4 percent registered in July, indicating contraction in the non-manufacturing sector for the 11th consecutive month but at a slower rate. The Non-Manufacturing Business Activity Index increased 5.2 percentage points to 51.3 percent. This is the first time this index has reflected growth since September 2008. The New Orders Index increased 1.8 percentage points to 49.9 percent, and the Employment Index increased 2 percentage points to 43.5 percent. - ISM Sept 3
• According to the NMI, six non-manufacturing industries reported growth in August. Respondents' comments are mixed about business conditions and the overall economy; however, there is an increase in comments indicating that there are signs of improvement going forward." - ISM Sept 3
• The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 124.7 in the week to August 28 from a downwardly revised 124.3 in the previous week, originally reported as 124.4...The index's annualized growth rate rose to 20.8 percent from 19.6 percent a week earlier. The latest reading was the index's highest yearly growth rate since the week to May 21, 1971, when it stood at 21.3 percent..."With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect," said ECRI Managing Director Lakshman Achuthan. - Reuters Sept 4

China Economy

• China’s manufacturing expanded at the fastest pace in 16 months in August as the economy maintained momentum after record lending in the first half of the year...The official Purchasing Managers’ Index rose to a seasonally adjusted 54 from 53.3 in July, the Federation of Logistics and Purchasing said today in Beijing in an e-mailed statement. A reading above 50 indicates an expansion. - Bloomberg Sept 1
• Despite the credit tightening measures, we believe the liquidity is still abundant, because:  Bank loans in the first half may already be sufficient to support fixed asset investment this year; Maturing bill financing may give banks more lending room. Medium- and long-term loans in July actually increased 64% from last year, offset by a large reduction in bill financing. Bank credit is unlikely to be too tight, given the large scale of projects already started and 35% of the central government’s stimulus spending being allocated in Q4. - Canaccord Sept 2
• In the first half of 2009, China’s fixed asset investments (FAI) increased by 36% from 2008, while new loans increased by 200%. As illustrated in the figure below, China’s new loans historically represented about 26-29% of total FAI, but in the first half of 2009, this ratio increased to 85%. Even though the government lowered capital requirements for investment projects by 5-10% this year, such a high amount of loans issued is likely already sufficient to support the FAI growth this year. A large portion of the loans have been invested in the real economy. - Canaccord Sept 2