Thursday, July 24, 2008

Aluminum prices hit all-time high

Aluminum hit a succession of all-time price highs this month despite a weak demand.

A commodity broker pointed out:

"When you hear producers in China are shutting production because demand is weak, that's normally bearish, yet the market saw insane price moves."

On July 7, the price climbed to a record peak of US$3,327 per metric ton in the London Metal Exchange (LME), breaking previous high of US$3,260 per metric ton that was recorded about 10 years ago. Then on July 10, it soared to a fresh all-time high at US$3,380 per metric ton.

A London-based trader said the July 7 price move must not have been due to Chinese power / production issues, but the move was due to a market exercise.

*Download podcast: Power shortages drive aluminum price rises

Sunday, July 20, 2008

Liv-ex: The place to trade investment-grade wines

The London International Vintners Exchange (Liv-ex) is the leading exchange for fine wine. Founded in 1999, the exchange runs an internet and phone based information, trading and settlement platform for fine wine merchants. The bulk of Liv-ex transactions are in the best French labels from Bordeaux, Burgundy, Champagne and the Rhone, but not exclusively so. The best names from Italy, Germany, Spain, Portugal and the New World are also traded.

Standard Contract Terms

  • All wines priced under bond in London in British pound (₤).
  • Delivery within 14 days (en primeur within 90 days of release from chateau).
  • Stock in original packaging and in good condition (re-imports from U.S. or Asia must be sold as special contracts).
  • Payment is 14 days from month of receipt.
  • Credit subject to insured limit.

The Liv-ex Indices

The Liv-ex 100 Fine Wine Index, is touted to be the world's version of the S&P-500. It is widely acknowledged as the fine wine industry’s leading benchmark. The majority of the index consists of Bordeaux wines – a reflection of the overall market – although wines from Burgundy, the Rhone, Champagne and Italy are also included.

On the other hand, the Liv-ex Champagne 25 Index tracks the price of 25 of the world's most sought-after Champagnes.

Current Market Conditions

Currently, the Liv-ex 100 Index and the Liv-ex Champagne 25 Index have risen 8% and 27%, respectively in the 12 months ending in June. That's against a 14.8% drop in the FTSE-100 during the same period.

According to Justin Gibbs, a director of Liv-ex:

"It's a simple case of demand outstripping supply. People are quick to glug Champagne as soon as they buy it".

He also adds:

"While top Bordeaux reds are typically laid down for 20 years, Champagne is ready to drink as soon as it lines store shelves."

Driven by this demand, the price of Champagnes such as Krug, Dom Perignon and Louis Roederer Cristal have soared over the past year, overtaking the big names of Bordeaux as an investment, at least for the time being.

About a year ago, a case of Krug 1996 would have set you back just under US$3,000 on the auction market, but now it's worth US$4,713.40 (₤2,350). Louis Roederer Cristal 1989 is now worth 39.1% more than in 2007, bringing in $6,417.90 per case.

On the other hand, Bordeaux prices skyrocketed from the strong vintage in 2005 and then held steady on the 2006 wines. The 2007 vintage is considered a weak one by market analysts as some interests turned to Champagne instead. Still, it's not enough to lure leading wine funds away from their traditional staple investment of claret (the British term for Bordeaux red wine).

While Champagne valuations may be driven up by consumption, the price of fine Bordeaux red is driven only in part by the scarcity of supply.

Wednesday, July 16, 2008

Freddie Mac and Fannie Mae in SOS

After the collapse of IndyMac, the US government is now planning to help Freddie Mac and Fannie Mae out of trouble.

The Fed and the US Treasury are willing to lend money and buy shares just to stabilize the two pillars of the American housing market.

Nonetheless, efforts by the government to save the couple seem not enough to boost investors' confidence. Wall Street continues to sag. Shares of Fannie Mae fell 5.1% to US$9.73 per share, while those of Freddie Mac slid 8.3% to US$7.11 per share, both in NYSE trading last Monday (July 14).

From the website of www.slate.com:

As of yesterday's close, Fannie Mae had a market capitalization of about $13 billion and Freddie Mac was worth about $5 billion. Given the massive size of their portfolios and the potential for losses, it's clear they will need to raise sums that may equal or dwarf their current market capitalizations. Given the firms' distressed state, buyers would certainly demand a discount. As J.P. Morgan CEO Jamie Dimon said in his now-famous formulation about Bear Stearns, "Buying a house is not the same as buying a house on fire." Fannie Mae and Freddie Mac are houses on fire. And this mentality leads to a vicious cycle: Investors jump ship because they fear dilution, and the more the stock slips, the more dilute capital-raising becomes.

Wednesday, July 9, 2008

High trending steel

Almost all finished steel products are currently priced above US$1,000 per metric ton, ex-works basis. Since November 2007, the world export price for hot-rolled band has risen from about US$600 per metric ton to US$1,024 per metrci ton in May 2008 – an increase of more than US$400 per metric ton, or about 71%. Hence, consumers are asking what would be the justification for this current "steelflation".

For sure, steel producers will be citing the continuous price hikes of raw materials that are affecting global businesses. According to World Cost Curve results conducted by Platts, the average cost to produce hot-rolled band including overhead has risen from US$483 per metric ton in the fourth quarter last year to US$673 per metric ton this year.

For instance, in the U.S. market, a semi-finished slab is not cheap as it is priced at about US$850 per short ton. Its conversion from slab to coil is estimated at US$60 to US$70 per short ton. Tolling fee is about US$100 per short ton. That variables alone, excluding mark-ups, have totaled more than a thousand dollar per metric ton for a finished coil product.

It was observed that steel mills have announced spot-market increases on an almost weekly basis – many of those well in excess of US$50 per short ton at a time. The same holds in Europe.

Here are some updates on what is happening in the steel market.

The hot-rolled coil (HRC) in the US market is up 88%, from US$565 per short ton, ex-works Indiana in the fourth quarter of 2007 to nearly US$1,060 per short ton in June 2008. Over the same period, the hot-rolled coil in Europe surged 78%, or Є225/metric ton, ex-works Ruhr to Є705 per metric ton.

Cold-rolled coil in the US market is up 79% since December 2007 to US$1,130 per short ton, ex-works Indiana from US$635 per short ton. In Europe, the cold-rooled coil is up to Є770 per metric ton, ex-works Ruhr in early June 2008 from Є550 per metric ton since December 2008.

The Platts Eastern Mediterranean rebar export price was $630 per metric ton, free-on-board Turkey in December 2007, but it has almost doubled to US$1,200 per metric ton recently. In the U.S. market, domestic rebar is up to roughly US$900 per short ton, ex-works US Southeast mill from about US$600 per short ton in December last year. In Northwest Europe, the Platts price assessment of rebar has swelled nearly Є340 per metric ton to Є780 per metric ton since December 2008.

With regard to imported plates in Europe, their price has risen Є830 per metric ton in early June 2008 from Є655 per metric to, including cost of insurance and freight, Antwerp in December 2007. Domestic plates have also gained nearly 27%, increasing to Є845 per metric ton from Є670 per metric ton over the same time period.

On the other hand, domestic plate prices in the U.S. increased 54% since December 2007, to about US$1,240 per short ton, ex-works Southeast U.S. mill, from US$805 per short ton. Imported plates have gained 47% over the same timeframe to US$1,130 per short ton, including cost of insurance and freight, Houston from US$770 per short ton in December 2007.

Scrap prices have surged too. According to Platts, the A3 grade price is up 99% to US$680 per metric ton, freight-on-board, Black Sea from US$342.50 per metric ton in December 2007.

Wednesday, July 2, 2008

Another crude peak

Global crude oil prices have doubled in the past year and have risen by almost 50% since the start of 2008. On Monday (June 30), prices breached US$143-per-barrel level to settle at a new peak of US$143.67 per barrel in New York trading.

Oil producers blame speculation, growing demand and high taxation of oil products in consumer countries as the reasons for rising oil prices. However, consumers train their sight on tight supplies, the middle-east crisis and "the cartel", i.e., the OPEC (Organization of Petroleum Exporting Countries), as the culprits.

Due to another round of crude price hikes, the Philippines is set to remove tariffs levied on imported oil to help local consumers and businesses cope up with oil-induced inflation.