Monday, 14 May 2012 (2:55pm)

Weekly commodity review: 14 18 May 2012

Oils update: Underweight
Crude oil prices continued their descent and declined again during last. The news from OPEC of the steady rate of OPECs oil production and the rise in OECD oil inventories is plausibly a sign that crude oil prices, from the standpoint of the fundamentals, may continue to fall. By Friday it was reported that the U.S PPI declined by 0.2% in April. This news along with the news of the disappointing industrial production rates in China and India during April was plausibly among the factors to pull down crude oil prices. The oil stockpiles slightly increased during the previous week by 1.5M bl. By the end of last week, WTI oil declined by 2.4% and Brent decreased by nearly 1%; as a result, the difference between Brent and WTI reached $15.92/b on Friday.

Recommendation for this week

Overweight: grains and precious metals. Underweight: base metals and oils.

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Precious metals: Overweight

The precious metals market continued to show weakness all through last week as both gold and silver sharply fell. During the month so far gold has shed 4.82% off its value and silver tumbled down by 6.85%. At the current progress this could be the worst performing month for bullion this year so far and worst since December 2011. The result of the elections in France and Greece raised the concerns that the austerity plans in these countries wont be carried through by the new elected officials. This news weakened the Euro and as a result precious metals also suffer from the strengthening of the USD. The industrial production output of China and India may have also adversely affected commodities rates. Several U.S reports came out during the week but didnt seem to have much of an effect on the markets: The U.S PPI declined by 0.2% in April; U.S initial jobless claims remained virtually unchanged at 367k according to its latest update. By the end of the week, gold fell by 3.72% and silver by 5.07%.

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Base Metals: Underweight

The Chinese trade data released last Thursday continued to reflect poorly on the state of the global economy. Both exports and imports increased by less than what was expected, leaving the surplus above the USD9.9bn consensus, at USD18.4bn. Beleaguered demand abroad continued to manifest: export growth increased by half the pace anticipated, moderating from 8.9% in March, to 4.3% in April. Imports slowed down from 5.3% in March, to just 0.3% in April. Copper imports declined m/m in April. The steep backwardation in the LME forward curve, as well as the recent stockpiling in China and the weak spot CIF Shanghai premiums all indicated that imports are likely to decline. China imported 375,258mt in April, down 18% m/m. Copper cancelled warrants as a percentage of total LME inventory continues to decline, now standing at 21% (down from 42% last week). The driver of this remained the metal was being put back on warrant rather than a rise in the LME metal inventory. With Brent crude still struggling, aluminium is also likely to struggle.

About Kuziva Muganiwa Global Markets Strategist

Kuziva holds an MSc degree in Banking and Finance; a BSc. (hon.) degree in Applied Mathematics. Kuziva is responsible for providing fundamental and technical analysis for directional trades in CFDs, currency futures, single stock futures (SSFs) and offshore commodities. Before joining Vunani, Kuziva worked for Bosveldgraan International Trading in Erasmuskloof, Pretoria as Chief Strategist for Africa Commodity Markets, spearheading business development with Africa soft commodities stakeholders in Zambia, Zimbabwe and Botswana. Kuziva is a registered JSE Commodity Trader.

Sugar/Soybeans/Wheat: Overweight
The China Sugar Association says China produced 707,850 metric tonnes of sugar, white value, in April 2012, up from 554,400 tonnes in the same month last year. On the other hand, Sugarcane mills in top sugar producer Brazil's main growing state should see favourable weather this month, after an unusually rainy April delayed the start of the 2012/13 harvest, according to Dow Jones. That's good news for sugar and ethanol producers, whose machines can't harvest cane as effectively when the ground is wet from rain. Less rainfall from now through the end of the harvest also bodes well for the quality of the cane since it allows sugars to become concentrated in the plants. US soybean prices came under some pressure in the past week with the old crop contracts leading the way lower. On a monthly basis US soybean contracts ended mixed with old crop prices gaining 1.4% while new crop prices gave up 0.92% in the past month. US soybean old crop contracts reached a multi-year high of 15.12/bushel early in May but the market sold off after that. US soybean contracts became heavily overbought and some liquidation followed which pressured especially old crop prices. Another factor that pressured US soybean contracts in the past week was the weakness seen in the outside markets. The dollar gained some solid ground breaking below 1.30 and nonagricultural commodities came under some pressure which also limited the buying in the US grain and oilseed markets. Bearing in mind that the investment funds are holding on to a record net long position, this makes the market vulnerable to a pullback.

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