ETP Weekly : cyclicals gaining traction

Industrial metal ETPs recorded a second consecutive week of inflows, while precious metals, weighed down by gold and silver, posted outflows. Commodity investors appear to be rotating toward more cyclical assets as the global economic recovery remains intact….

ETF Securities Research

In our view, industrial metal prices have now fully adjusted to expected increases in supply and concerns over a slowdown in the Chinese economy are overblown, with authorities committed to growth of around 7-8%. Despite lingering concerns over emerging market growth, particularly China, there is good reason for rising investor optimism toward cyclical commodities, with global manufacturing indices running above post crisis trends. Industrial metals are likely to gain further traction this week, with Chinese economic activity indicators likely to remain firm.
ETFS Physical Platinum (PHPT) received the highest inflows since September 2012.
US$37.5mn of inflows were recorded last week as investors feared that above ground stockpiles of platinum group metals were likely wearing thin. Strikes in South Africa have now entered their 12th week, eating into inventory that major global producers had kept aside for such events. The main producers in South Africa (Lonmin, Amplats and Impala) have declared force majeure on some of their contracts, highlighting the difficulty in getting supplies of the metal to buyers. The platinum price rose 1.3%, while palladium rose 0.3%.
ETFS Nickel (NICK) saw the highest inflows since January 2014. As nickel prices rose 4.8% last week, inflows into NICK amounted to US$15.5mn. Nickel is the best performing industrial metal year-to-date, up 23%, following on from Indonesia’s export ban and shrinking Chinese stockpiles. China imported about 58% of its nickel ore from Indonesia in 2013 and consensus is that the country only holds enough inventories to keep production going for 6-8 months. Some fear that potential sanctions against Russia could also contribute to further tightness in nickel ore.
Long gold and silver ETPs continued to see outflows last week despite positive price performance. Long gold ETPs saw outflows of US$33.9 (third consecutive week of outflows) while long silver ETPs posted outflows of US$33.4mn (second consecutive week of outflows) as investors rotate away from the defensive and into cyclical assets. We note however, that the road to economic recovery is unlikely to be without any bumps and the 2.8% and 2.1% rise in gold and silver prices last week was a cogent reminder of how the precious metals respond to disappointing economic news.
ETFS Brent (OILB) investors withdraw US$18.4mn, the largest in 12 weeks. Investors took profit on a 3.1% rise in Brent oil prices, marking the first net outflow in long Brent oil ETPs in three weeks. Libya’s oil protection force was unable to regain full control of the Zueitina port from rebels, delaying the expected supply of oil into the international markets and driving global prices higher.
ETFS Energy (AIGE) receives highest inflows since August 2012. Rising demand for crude oil combined with weather-related spikes in natural gas has kept investors interested in the energy sector as a whole. US$7.6mn of inflows into AIGE last week highlights the level of optimism for the sector.
Key events to watch this week. Cyclical commodity investors will be closely watching Chinese Q1 2014 GDP for clues on the strength of demand, with a consensus forecast of 7.3% yoy. Industrial production and retail sales data from China will also provide useful for guidance on how the world’s second largest economy is faring. US, Euro Area and UK inflation figures for March will provide a sense for the capacity for continued central bank stimulus. This week’s release of EU car registrations will confirm whether the up-trend has remained and if so the release could bode well the platinum group metal prices.


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