Monday, January 4, 2010

Rhodium: the New Copper?

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With traditional commodities now completely swamped by (a) the demand whims of the Chinese [May 13, 2009: Commodities - It's China's World: We Just Live in It] and (b) the purchases and techniques of institutional investors i.e. hedgies and investment banks [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators] - it is much more difficult now to use traditional pricing mechanisms to figure out what is going on in the world.  After all, if enough investment banks like JPMorgan are willing to buy loads of crude oil, use Ben Bernanke's nearly free money, to store it offshore waiting for higher prices to sell it - how can we use that as a "sign of demand?"  [Jan 11, 2009: 60 Minutes - Speculators and Oil] Financial "innovation" along with the vacuum cleaner that is China have changed the game.

Copper has been, of all the commodities - even more so than oil - the traditional sign post of global health - due to it's widespread usage.  For example we flagged it in 2007  [Nov 23, 2007: Is Copper Signaling a Slowing Global Economy?]  However, with the earlier mentioned dominance of China   [Mar 23, 2009: FT.com - Chinese Stockpiling Spurs Copper Price Rally] it is hard to figure out if it's telling us the same things it used to.

So instead of Doctor Copper,  maybe we need a new physiciain - one not influenced by the heavy hand of easy money by central bankers fed into our investment banks and by proxy the hedge funds.  Perhaps we can call on Doctor Rhodium?

Via WSJ:
  • As stock and bond investors debate whether the U.S. economy's recovery has legs, some analysts are looking beyond the traditional flurry of data for evidenceThey're focused on demand for relatively obscure metals and fuels, like rhodium, which is used in car parts and is considered by some as a key barometer of auto demand, as well as diesel fuel. Prices of both are reaching new highs, leading some to believe that a real recovery is taking hold.
  • Unlike gold and platinum, specialty metals like rhodium aren't traded on commodity exchanges, making it hard for hedge funds and other investors to buy them as speculative bets. (which is important when trying to figure out reality versus "bets on reality") Prices are set by producers and users of the metal, linking them more closely to real demand. (so old school, so anti - financial innovation)
  • Rhodium, for example, has risen 60% since mid-October and now fetches $2,360 per troy ounce.  "We'll keep watching rhodium. These smaller metals are very sensitive to changes in demand, making them a good indicator of what is happening out there," said Theresa Gusman, head of commodities at DB Advisors, the asset-management arm of Deutsche Bank AG.
  • About 80% of the metal is used by auto makers in catalytic converters. (palladium is similar in use - but lo and behold a new ETF for palladium is on its way, another metal which will be captured by the speculator class) Rhodium's strength bodes well for the U.S. auto and auto-related industry, which constitutes 4% of the country's gross domestic product and hires 10% of the total work force.
  • Many bulk commodities also have gotten pricier recently. Prices of iron ore, a main material to make steel, rose to its highest level of 2009 in China, the biggest buyer, on Wednesday. Coal prices gained 6.4% at the New York Mercantile Exchange in December.  (these are much more heavily influenced by China, especially iron ore)
  • To be sure, the relative illiquidity of markets for specialty commodities can also cause swings in prices. Rhodium prices, for example, tumbled 20% in early December after nearly doubling in two months. But the metal recouped most of its losses recently.
There are also similar examples even in energy once you move to places Goldman Sachs does not play in...
  • Energy use, which powers economic growth, also has shown signs of lifePrices of "bunker fuel" made new highs in recent days, pointing to burgeoning demand from industrial users. Bunker fuel, also known as residual oil, is the cheapest liquid fuel and not traded as a financial asset  like crude oil or natural gas. Because of its very high sulfur content, residual oil is only used by power plants and large ships that are able to process it.

Sounds promising ... meanwhile other signs are not as hearty.  As we've reported in the past, Americans in 2008 - for the first time in 25 years - drove less miles than the previous year.  [May 2, 2009: Green Shoot Alert - Higher Unemployment Leads to Less Road Congestion] It looks like 2009 might be flat or even worse than 2008, which is remarkable when you consider population growth. 
  • Lower gasoline prices didn't drive Americans to spend more time on the road in 2009, in part because people who lost their jobs stopped commuting. Motor travel was expected to increase in 2009 after a jump in prices at the pump and the economic downturn led drivers to cut back a year earlier. In 2008, U.S. highway officials didn't record a year-over-year increase for the first time in 25 years.
  • But a tally of miles driven by U.S. passenger and commercial vehicles for the 12 months ending in October, the latest available, indicates that drivers still avoided their cars in 2009. In fact, it is possible that final 2009 numbers from the Federal Highway Administration will show that Americans drove fewer miles than in 2008.
  • Ms. Lundberg said the most important factor in motorist activity -- commuting to work -- has been "hit in the guts" by rising unemployment. "....people are driving less because they don't have jobs."
  • Many people looking for full-time work have accepted part-time hours, including fewer days on the job, meaning that "even for somebody with some work, the consumption of gasoline is decimated," she said.
  • Omar Fortune, manager of a private job center in Houston, said more workers seeking his help were carpooling or leaving their cars at park-and-ride centers to take public transportation. "Cars are being repossessed or sold to take care of other bills," he said.
  • Gerald Faudel, vice president of government relations and environmental affairs for Frontier Oil Corp., an independent refiner that serves the Rocky Mountain and Midcontinent regions, said gasoline demand dropped 10% in 2009 from a year earlier in the territories Frontier serves.  "People just aren't driving as much, and the truckers aren't moving as much merchandise," said Mr. Faudel. In addition, "there's a lot of discretionary driving that's been curtailed."


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