Commodity prices remain strong in European session as strong economic data continues to stimulus risk appetite. WTI crude oil price soars to 75.7, erasing all losses made last Friday, while Brent crude rallies to 77.4/77.5. Comex cold price changes little around 1230. Outlook remains firm.
Eurozone's industrial production grew +0.8% m/m (consensus: +0.5%) in April, following a rise of +1.3% in the prior month. On annual basis, industrial production expansion accelerated to +9.5% from +6.9% in March. In the UK, the Office for Budget Responsibility said in the Pre-budget forecast that deficit will narrow from 155B pound in this fiscal year to 71B pound by April 2015, 22B pound more than previously forecast. Yet, economic growth will slow down to +2.6% y/y in 2010, compared with +3.25% as predicted by the Labour government in March.
Base metals generally grind higher amid better market sentiment. Nickel, gaining more than +8%, was the best performer among key LME base metals last week. While the outperformance was probably a rebound after the selloff in the previous week as well as a -18.8% slump in May, nickel has been so far the only base metal recording gains in price return since the beginning of the year.
Apart from speculative trades, strength in nickel since the beginning of the year until emergence of European sovereign crisis was driven by tightness in the physical market. Mine production was disappointing as driven by strike at Vale's Sudbury mine (80K ton in production) and uncertainty in production volumes in new mines including Talvivaara and Goro. Potential deficits triggered surge in physical premia paid on top of LME quotes, including items such as transportation cost and insurance, the US, Europe and Japan. Demand also improved due to recovery in stainless steel production. However, these favorable factors are diminishing with the impact getting more obvious in the second half of the year.
Around two-third of nickel in China, the world's largest nickel consumer, is used in production of stainless steel. While some analysts have forecast stainless steel production in the world to increased 15-20% annually in 2010, production has already risen +50% over the past few months. Therefore, growth rate will likely slow down over the rest of the year. Recent decline in nickel price has reduced the incentive for restocking and the situation will be exacerbated by a traditionally weak season for demand in China and the country's measures to cool down the property market.
That said, as price has slumped almost -30% from a 2-year high of 27595 (April 16), further severe selloff should be limited. We expect price to trade sideways for most of the time in the second half of the year.