Fairfax Market Report

High commodity prices combine with higher energy price levels to squeeze manufacturing margins, making currency rates ever more critical.
The impact of rising commodity prices is now more quickly passed on to end users and is now a much greater proportion of the product cost.
China has forced manufacturers, worldwide, to reduce costs and cut margins meaning that the cost of commodity input now has a greater bearing on the cost of the end product, particularly for engineered products.
The tide of consumption may be turning towards China as Chinese consumers move to buy Western goods such as cars. This consumption may be helped by new currency rules as well as newly generated wealth in China.
The inflationary impact of high commodity prices may well cause the market to find new balance, eg a level where elevated commodity prices do not overly impact on prices and demand.
We now appear to be entering a period where the control and ownership of commodities is of critical importance and the prices of these commodities is determined more by demand and availability than by supply.

Delivery of key commodities appears increasingly subject to disruption in an increasingly tight supply chain
Climate Change (not global warming) is disrupting energy and commodity supplies
Flooding is Australia is driving coking coal and steel prices beyond expectations
Flooding in New Caledonia may disrupt significant nickel production
Flooding in Brazil is a major local issue

Electric vehicle market development
GM has provided an insight into how electric vehicles have been improving efficiency at auto manufactures with the company stating that it will phase out the use of Gas powered forklifts and replace them with electric versions that will not require topping up during shifts.
The move is expected to save around 10 minutes per vehicle per day in refuelling time.

Economic News

China On Friday the central bank ordered lenders to hold more deposits as reserves, raising the required ratio by 50 basis points. For some of the biggest banks the reserve requirement now stands at around 19%. The move comes as the government continues to try and absorb some of the liquidity in the market resulting from the inflow of money into the country and recent efforts to limit the yuan s appreciation. In 2010 Banks issued 7.95 trillion yuan of new loans last year, exceeding the target of 7.5 trillion yuan.
It is estimated that Chinese demand for European manufactured cars will have climbed to 25 times 2005 levels by the end of 2011 putting huge pressure on shipping industry that is tasked with transporting the cars to China. Demand for European cars in China is only expected to grow as the middle class in the country continues to expand with an insatiable appetite for luxury goods.
The chief economist at the National Bureau of statistics is being quoted in local media as stating that inflation could rise around 4% this year.
The Industrial and Commercial Bank of China has announced plans to open 5 branches in Europe over the next two weeks that will more than double its European high street presence. A sign of things to come?
China appears to have started internationalisation of the Yuan. Chinese companies are now being allowed to hold Yuan deposits overseas.

US Figures released last week show that US banks are finally expanding their loans to consumers for the first time since the credit crisis erupted, on the back of lending standards loosening and demand for new loans starts to pick up. According to Moody s in the third quarter, lenders made more than 36 million consumer loans, up 3.7% from a year earlier. Additionally consumer loan originations are expected to climb 5.9% this year significantly higher than the 1.1% increase in 2010.

Europe Finance Ministers meet today to start work on re-structuring the Eurozone rescue fund, as Germany eases its opposition to the fund. In spite of the successful auction last week concerns still remain surrounding Portugal and whether the country will succumb to bailout experienced by Greece and Ireland
On Friday Fitch cut its debt ranking for Ireland to junk status.

Australia - The National Australia Bank has estimated that mines in the Queensland state may take as long as six weeks to resume production. The halts in production are resulting in about A$600 million ($593 million) of lost revenue a week at current prices.
Fresh new regional concerns In the south-eastern state of Victoria as flooding is affecting 43 towns and 1,400 properties, according to emergency services.

Solomon Islands Continuous bad weather is expected in the Solomon Islands as a result of Cyclone Zelia. Warnings of winds in excess of 25 knots and excessive rain have been released for the rest of the week.
Severe weather forecasts have forced the closure of 5 mines in New Caledonia that are responsible for around 4% of the global nickel production. New Caledonia located between Tahiti and Australia is home to a quarter of the World s known nickel reserve and is expected to be hit hard by Cyclone Vania towards the end of the week.

Ivory Coast Talks continue in an effort to bring a peaceful resolution to the disputed election. Kenya s Prime Minister Raila Odinga is expected in the country later today to try and mediate the standoff. Regional leaders recognise Alassane Ouattara as the rightful winner of the election but incumbent President Laurent Gbagbo refuses to hand over power and is continuing to call for the UN to leave the country. 247 people had been killed in country since the election on November 28.

Currency The euro is off slightly this morning as concerns remain over the regions debt problems as Finance Ministers meet. The dollar is up slightly this morning against most of its major counterparts as Eurozone concerns continue to plague the market.

US$1.329/eur vs $1.343eur yesterday. Yen82.92/$ vs 82.48/$ SAr6.94$ vs 6.83/$ $1.585GBP vs 1.584/GBP

Commodity News

Precious Metals:
Gold US$1,362/oz vs US$1,369/oz yesterday Prices are up this morning as the market digests the downgrade on Friday of Greece s debt and concerns over the Eurozone re surface.
Barclays have stated in a report that they expect the medium term target could be between US$1,460-1,485.
SPDR gold trust falls to 1,259.33 (40,488moz) from 1,265.09t (40.673moz) Current value US$55,339bn
Platinum US$1,814/oz vs US$1,809/oz yesterday
Palladium US$792/oz vs US$802/oz yesterday
Silver US$28.31/oz vs US$28.75/oz yesterday
Rhodium US$/2425/oz vs US$2,425/oz yesterday -

Base metals:
Copper US$9,628/t vs US$9,558/t yesterday Prices are off slightly today as the dollar rebounds.
JP Morgan has estimated that copper consumption growth in China may almost halve this year as government efforts to curb monetary expansion impact demand.
Estimates by the Macquarie group suggest that global demand may grow by around 6% this year after 10% growth in 2010.
Aluminium US$2,469/t vs US$2,487/t yesterday
Nickel US$25,708/t vs US$25,469/t yesterday
Zinc US$2,449/t vs US$2,443/t yesterday -
Lead US$2,676/t vs US$2,625/t yesterday
Tin US$26,970/t vs US$26,700/t yesterday The Malaysia Smelting Corporation has estimated that prices may surge to more than US$40,000/t over the next 4 years as supply fails to meet demand. The group CEO is quoted as saying that a price of US$35,000 to 40,000 in the net five years is not impossible . Industry group ITRI is forecasting the market to remain in deficit for the next two years.

Energy:
Oil US$98.30/bbl vs US$98.24/bbl yesterday Prices are off slightly this morning as the market digests the further Chinese efforts to curb excessive money supply in the market and the knock on effects on demand that it might have.
Alyeska Pipeline plans to start its Trans Alaska Pipeline System today after repairs to line the carries 11% of U.S. crude production are completed.
Gas US$4.490/MMBTU vs US$4.416/MMBTU yesterday
Uranium US$66.00/lb vs US $63/lb last week
Coking Coal- The McCloskey Group is the latest industry player to state that it expects prices to breach the $300/t this year as the flooding in Australia impacts supply and demand continues to climb in China and India.

Other:
Tungsten China s second largest producer, Jiangxi Tungsten Industry Group is to shut its 6ktpa ferro-tungsten plant in the second or third week of February for a 3 month overhaul and will restart in May according to Metal Bulletin.
The outage of this capacity will keep up pressure on Tungsten prices which are around record levels currently.
Longer term there is growing demand for tungsten projects outside of China. We recommend Ormonde Mining* as a developer of a large, low cost, high grade tungsten project in Spain (see note published 13.01.11 for more details).
* Fairfax acts as broker to Ormonde Mining

Iron Ore The recent rally in the steel market has seen spot Iron Ore up $1 at $182-184 in Shanghai today. Rebar improved on Friday s record moving 0.3% higher to US$746 today as market sentiment continued to improve.

Rare Earths The concerns over the supply of rare earths in the market has lead auto manufactures to seek alternative methods in alternative energy motor production. Toyota has announced that it is in the process of developing a motor in its hybrid vehicles that will not require rare earth minerals.
Fears are that China will halt exports of rare earths completely by 2012.

including EMED Mining, Baobab Resources, Wolf Mineral and Sirius Minerals