After what has been a solid month for equities and bond investors, month end flows have probably play their part in the price action overnight, US equities have lost momentum, UST have led a rise in core global bond yields and the USD is stronger. US and European inflation releases favoured the notion the Fed and ECB are done with their respective tightening cycles.
Bulk Commodities Update – June 2015
The changing composition of China’s growth model – towards services rather than heavy industry – means it is less commodity intensive than in the past.
• China’s economic growth has continued to slow in the early months of 2015. First quarter national accounts showed China grew by 7.0% yoy, down from 7.4% in 2014. The changing composition of China’s growth model – towards services rather than heavy industry – means it is less commodity intensive than in the past.
• According to World Steel data, global steel production was 535 million tonnes in the first four months of 2015, a decline of 1.6% yoy. Output in China fell more moderately, down by 1.0% to 269 million tonnes.
• China’s apparent steel consumption has fallen in early 2015 – down by almost 5% over the first four months of the year – reflecting the weak demand from China’s construction sector. We expect the country’s steel demand to remain subdued across this year.
• Key thermal coal consumers are lowering demand – with China addressing pollution and Japan nearing a phased restart of nuclear capacity.
• Reflecting the softer thermal coal demand conditions and excess capacity for supply, we expect weak conditions to persist. The 2016 Japanese financial year contract price is forecast at US$62 a tonne (from US$67.80 this year).
• Further cuts to metallurgical coal production are likely to be necessary, given the sharp fall in prices across recent months. Quarterly contract prices are forecast to average US$105 a tonne in 2015 and US$95 a tonne in 2016, though current weakness highlights downside risk.
• Higher cost iron ore production is finally exiting the market, however this excess supply will limit any significant upward pressure on prices. We forecast spot prices to average US$60 a tonne in 2015 and ease further to US$57 a tonne in 2016.
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