Weekly Round-Up: Commodities Drop Despite China Rate Cut

Commodities were battered by a selling spree this week as investors continued to fret over Europe’s effect on global growth and whether the US Federal Reserve would take immediate action to prop up the still-fragile economy. However, hopes are rising that Beijing’s rate cut will bolster demand worldwide, especially as China is the world’s biggest consumer of copper. Manufacturing growth is expected to lead to greater energy demand as well. 

In the near term, cautiousness prevails regarding Europe, especially as Fitch Ratings cut Spain’s credit rating to BBB from A as the country’s banking sector struggles amid a lingering recession. Germany is also struggling, with April exports considerably weaker than what analysts had expected, falling 1.7 percent compared to March. As a result, market players will be closely following EU leaders’ teleconference regarding Spain, which is being held this weekend.

Hopes that the Federal Reserve will take immediate action to prop up the US economy have been dashed as Fed Chairman Ben Bernanke told the Joint Economic Committee on Thursday that while the central bank is “prepared to take action as needed,” it still needs to study economic developments to assess risks.

Nevertheless, some analysts are keeping their hopes up for coordinated action by the world’s top economies either ahead of or following the G20 meeting in Mexico that begins on June 18. The meeting falls the day after the Greek election; the next Federal Open Market Committee meeting will be held from June 19 to 20.

China’s decision to cut key rates by 0.25 percent for the first time since 2008 is now one of the brightest spots driving up commodities demand. However, speculation is growing among some analysts that Beijing will be reporting worse-than-expected economic data next week, which could offset the optimism.

In early morning trade Friday, Brent crude is 1.9 percent lower at $98.07 a barrel, while copper is down 2.7 percent at $3.27 a pound and gold is 0.6 percent weaker at $1,578.50 an ounce.

 Oil

Concerns about weaker energy demand worldwide have continued to push down crude demand, and market eyes are on the June 14 meeting of the Organization of the Petroleum Exporting Countries for clues on how supply may affect market prices moving forward. Algerian Energy Minister Youcef Yousfi said that OPEC will “study the price decline” and seek to keep the crude market balanced.

Total (NYSE:TOT) CEO Christophe de Margerie told Dow Jones that “OPEC has all the means to prevent (crude) oil prices falling too low,” but added that “the fundamentals plead for higher oil prices, as underlying demand is still high and the geopolitical tensions are higher than ever.”

Certainly, supply risks from the Middle East remain, not least from Iran due to continued international sanctions.

In Mexico, state-operated PEMEX identified the 16 private groups bidding for a second round of oil field operating contracts. Chevron (NYSE:CVX) and Repsol (OTC Pink:REPYY) are among those that are bidding for the contracts, which will be awarded June 19. Chevron has been upgraded to buy from hold by Societe Generale as the company’s production volume is expected to increase when large projects come online.

BP’s (LSE:BP) 50 percent stake in Russian unit TNK-BP remains up for grabs, but Gazprom Neft (OTC Pink:GZPFY) has denied mounting speculation that it will be buying the share in the company.

Royal Dutch Shell (LSE:RDSA) is preparing for a public confrontation with Greenpeace, as the environmental group plans to deploy two submarines when Shell begins drilling in the Arctic. Shell is planning to drill up to five exploratory wells off the coast of Alaska, which will be some of the first to be drilled in US Arctic waters.

Toronto’s Pacific Rubiales Energy (TSX:PRE) acquired PetroMagdalena Energy (TSXV:PMD). PetroMagdalena shareholders will receive C$1.60 for each outstanding share.

Copper

Copper investors are particularly hopeful that China’s rate cut this week will spur demand for the red metal, as China accounts for over 40 percent of the global market. The metal may also go up should Chinese copper exports decline.

China’s Jiangxi Copper (HKEX:0358) is considering stopping exports to the London Metal Exchange’s warehouses as the price of copper drops, according to Bloomberg. The president of Jiangxi’s trading unit, Su Li, said this week that while the company will fulfill its existing export contracts, Jiangxi will “look at the prices and other commercial considerations.”

Bruce Angiolillo, Grupo Mexico’s (OTC Pink:GMBXF) attorney, is looking to overturn an October 2011 ruling by Delaware Chancery Court that found that Southern Copper (NYSE:SCCO) overpaid for its takeover of Minera Mexico. The attorney, who is with the Simpson Thacher law firm, argued before Delaware’s supreme court that the $2.03 billion judgment excluded a key witness from Goldman Sachs, which advised on the deal. Southern Copper is part of Grupo Mexico, and a ruling by the supreme court is expected within the next three months.

African Copper (LSE:ACU) has secured a $6 million loan from ZCI, its controlling shareholder. The loan will provide working capital for its Mowana mine and will cover the funding gap caused by the failure of a Ball Mill pinion shaft last month.

Copper North (TSXV:COL) closed its non-brokered private placement of 6 million common shares at a price of $0.167 per share for aggregate gross proceeds of $1 million on June 1. The securities issued under the private placement cannot be traded until October 2.

Gold

Gold investors are taking a wait-and-see approach as they mull the allure of safe haven assets amid continued worries about Europe and hopes that demand will be driven up by emerging markets.

Barrick Gold (NYSE:ABX) replaced CEO Aaron Regent with CFO Jamie Sokalsky as the company struggles with disappointing share price performance. Chairman Peter Munk said that the company is “fully committed to maximizing shareholder value.”

Anglo Asian Mining (LSE:AAZ) released its JORC-compliant ore reserve statement for its gold, silver, and copper Gedabek mine in Azerbaijan, which has a total mineable reserve of 20.31 million tonnes.

“We are delighted to announce this ore reserve report which has significantly exceeded our previous internal estimate of recoverable ounces of gold at Gedabek and in turn has increased the life of mine. Importantly, in addition to the 532,607 ounces of recoverable gold at Gedabek we have an estimated 90,000 ounces of gold which is currently stacked on the leach pad or in unrecovered ore from the heap leach process, which will also be processed,” stated CEO Reza Vaziri.

US Silver (TSXV:USA) and RX Gold & Silver (OTCQX:RXEXF,TSXV:RXE) will merge to form US Silver & Gold, which will focus on US Silver’s Galena mine in Idaho, RX Gold’s Drumlummon mine in Montana, and US Silver’s Coeur redevelopment projects in Idaho. US Silver shareholders will receive 0.670 US Silver & Gold shares per US Silver share, and will effectively own approximately 70 percent of the combined company. RX Gold shareholders, meanwhile, will receive 0.109 US Silver & Gold shares per RX Gold share, effectively owning approximately 30 percent of the combined company.

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.