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Strong US job growth is leading commodities worldwide to gain ground. Market eyes have focused this week on the possible Glencore International merger with Xstrata.
Signs of steady growth in the United States are offsetting worries about the Eurozone’s economic fragility, lifting commodities across the board. Energy, as well as base metal demand, is climbing as manufacturing across the globe appears to be on an upward trajectory, but precious metals are slipping on profit-taking.
The release of the latest US jobs data further strengthened confidence in the economic outlook, as the US Department of Labor’s Bureau of Labor Statistics reported that January unemployment fell to 8.3 percent, its lowest level in three years.
Earlier in the week, the Institute for Supply Management reported that US manufacturing rose to a seven-month high as its key index rose a full percentage point to 54.1 percent in January from the previous month. Those numbers, coupled with the fact that the Federal Reserve will keep interest rates low until late 2014, are encouraging the bulls’ expectations that the US economy will continue to expand steadily.
A stronger euro is reflecting hopes investors have for the latest European finance ministers’ meeting held in Berlin on Friday, this time bringing together only the Eurozone nations that have kept their AAA rating, namely Germany, the Netherlands, Finland, and Luxembourg.
In morning trade Friday, Brent crude is up 1.1 percent at $113.26 a barrel, while copper is surging 2.4 percent to $3.87 a pound, but gold is trading o.7 percent lower at $1,740.80 an ounce.
Downside risks nonetheless remain, not least worries about the Fed’s prolonged easy monetary policy. While Fed Chairman Ben Bernanke testified before the lawmakers of the House Budget Committee that low rates would spur growth including more job creation, Republican members in particular including committee chairman Paul Ryan voiced concern about the policy increasing inflationary pressure. Concerns about a slowdown in the Chinese economy, as well as persisting anxiety about the future of the Eurozone also pose downside risks to fundamentals that investors still cannot shrug off.
On the corporate front, investors are looking to Glencore International (LSE:GLEN) finalizing its merger all-share merger with Xstrata (LSE:XTA), but Glencore stated Thursday that “there can be no certainty that any offer will be made.” If the $80 billion deal does go through, it will create a commodities behemoth that will create the world’s third-largest copper miner , the world’s largest zinc producer and thermal coal exporter. Speculation is growing that the merger of the two Swiss-based companies could lead to number of major mining groups such as Anglo American (LSE:AAL) and Freeport-McMoRan (NYSE:FCX) to partner up to expand their businesses too.
Oil
Partnerships are also moving forward in the energy sector, as Royal Dutch Shell (LSE:RDSA) said it is furthering its ties with PetroChina (NYSE:PTR) to explore unconventional gas resources. PetroChina bought a 20 percent stake in Shell’s Groundbirch shale-gas project in British Colombia, while the two companies will be jointly drilling 20 to 25 wells in China this year, up from 15 in 2011.
As for Japan’s JX Holdings (TSE:5020) , it is looking to oil-producing west African nations as well as Saudi Arabia and the United Arab Emirates to offset losses from a shutoff in Iranian oil due to US sanctions against the country, Reuters reported. JX buys about 90,000 barrels of Iranian crude a day.
Copper
In the copper sector, some investors including Goldman Sachs are concerned that the price of the red metal has risen too rapidly in recent months. In a report this week, the investment bank said that while the red metal was “undervalued,” the market had rallied “too much, too soon,” leading it to take a long position on copper. “We would see any pullback as a buying opportunity taking a six to 12 month view,” Goldman said.
Russia’s Norilsk Nickel (OTC Pink:NILSY) will be spending $1.1 billion by 2016 to develop the Bystrinsky copper field in eastern Siberia and increase output of the red metal by 16 percent from current levels, according to Bloomberg. The site is expected to yield 62,000 metric tons of copper as well as 6.3 tons of gold in concentrate per annum.
Gold
As for gold, it has reached its highest level in over two months as easy US monetary policy is keeping the dollar weak, thus making it cheaper to shore up the yellow metal.
Russia’s Polyus Gold (RTS:PLZL) is rising to its highest level in nearly three years on expectations that its parent company, Polyus Gold International (LSE:POLG), will make a buyout offer. Polyus Gold, led by Russian presidential hopeful Mikhail Prokhorov, reported earlier this week that increased output increased its earnings by 40 percent from a year ago to $1.04 billion to $1.06 billion last year.
I, Shihoko Goto, have no interests in the companies mentioned in this article.