Financial markets suffered further bouts of extreme volatility this month as worries persisted over the Euro zone sovereign debt crisis, monetary tightening in China and rising geopolitical tensions in the Korean peninsular. In late May, Fitch downgraded Spain’s debt to AA+ as worries mounted about the country's banking sector after the Bank of Spain stepped in to rescue CajaSur, a failed regional lender. Such news triggered severe sell-offs in equity, commodity and credit markets and sent investors scurrying for the perceived safety of “core” government bonds, the dollar and gold.
    Yet Euro zone industrial output in March rose for the tenth month in a row to 6.9% YoY compared to a 3.9% increase in February. Growth in the production of intermediate goods accelerated from 6.8% to 11.7% while the output for durable goods rose by just 2.2%.
    In the US, durable goods orders leapt a further 2.9% MoM in April, although this was largely driven by a rise in transport goods. Indeed, excluding this item, orders fell 1%. Nevertheless, it appears that US manufacturing will remain very healthy through Q2. US new home sales jumped 14.8% MoM and 47.8% YoY in April. Data from the US Commerce Department showed that consumer spending stalled in April after posting six consecutive months of gains. However, at 0.5% MoM real disposable income recorded its largest gain since 1H09 as a combination of greater labour market confidence and subdued inflation put more money in the back pocket. However, this month has been screened with too many imponderables to allow the commodity markets to refocus on these positive macro readings. As a result, the micro and macro environments are pulling metals prices in opposing directions sparking a surge in volatility which is likely to characterise the market for much of 2010.
    Some metals have suffered much worse than others so once the dust settles there could be some relative value opportunities. But from a fundamental perspective, in a market where there are demand doubts, price performance will be differentiated by the supply side, which means that zinc prices face the strongest headwinds while copper and nickel the least. Zinc production is growing the quickest of all the metals. With few constraints on the raw material availability, solid supply growth is expected to continue. Copper and nickel production, however, is struggling to grow in the face of lower ore head grades, labour issues and new project delays. Tin should also find support from a constrained supply environment, while market opinion is divided on lead.
    In China, the Ministry of Industry announced that it will seek the closure of more “outdated” metals production capacity over the next three years. It is targeting reductions of 300,000 tpy in copper smelting capacity and 600,000 tpy in zinc and lead smelting capacity.
    In Australia, the government announced proposals to impose a 40% tax on profits generated from mining in the country from 2012. Miners have contested it, and Rio Tinto and major miners said they would review all mining operations if the new tax comes into force. Such a draconian measure could definitely hamper domestic expansion.

    In London, the Lead cash settlement price decreased by over 18% to US$ 1,821 per ton while the Zinc cash settlement price dropped by over 17% at US$ 1,895.50 per ton on the 28th of May 2010.
    Along with the other base metals, lead and zinc prices fell dramatically, reaching their lowest since August 2009, due to fears over the European debt crisis, as well as over Chinese monetary tightening.
    Despite its recent poor price performance, lead fundamentals continue to improve. Chinese demand remains healthy, with the China Battery Industry reporting that lead-acid battery production was up by about 16%YoY in Q1 2010. While the momentum of growth in auto sales in April slowed as expected, sales still recorded solid growth of 35% YoY. The March ILZSG data release confirmed a lead global consumption in March rising about 12% YoY, with strength coming not only from China, but the rest of Asia, Oceania, and the US.
    Yet zinc has underperformed the rest of the base metals since the beginning of the year, largely because of its growing surplus and its rapidly expanding production. Paradoxically, the World Zinc Conference held this month in Bergen identified the looming concentrate deficit as the biggest long term risk to the zinc market following the permanent closure of mines during the downturn and lower ore grades slated for the next few years with scant new projects in the pipeline to replace them. The imminent issue regards Teck Resource’s mega-Red Dog mine (550K tpy), which Teck have given 50:50 odds of an approval in their favour.
    In Peru, Iscaycruz mine has re-opened following its closure in February 2009. Iscaycruz is expected to ramp production up to 8,000 tons in 2010 and 11,000 tons in 2011. Meanwhile the planned reopening of Doe Run’s La Oroya smelter (75K tpy of refined copper) did not go ahead. The company aims to reopen the smelter by 31 July after it was closed in June 2009. In 2008, its last full year of operation, La Oroya produced 114,000 tons of refined lead, 43,000 tons of refined zinc.
    LME lead stocks still stand at a seven year high of 190,600 tons while LME zinc stocks rose by over 13% to 619,000 tons.

 In London, the Copper settlement price dropped by over 6% to US$ 6,926 a ton with a contango of US$ 39 on the 28th of May 2010.
    In its April data release, the ICSG made several substantial revisions to its consumption estimates for 2009, including large upwards revisions to India (+63Kt), Korea (+146Kt) and France (+79Kt). This has resulted in a net increase of 172,000 tons in global consumption, which, together with a 32,000 tons downward revision to refined production, has pushed 2010 balance into a 155,000 tons deficit. Meanwhile, Chinese data have been positive, with April imports the third strongest on record and SHFE inventories falling. This is further evidence of strong underlying demand.
    The supply side continues to disappoint. Corporate mine production data for Q1 2010 showed another period of underperformance for many of the miners. BHP Billiton, Rio Tinto and Freeport McMoran (21% of global mine supply) all experienced weaker production with the common theme of lower ore grades. 
   With no real sizeable fresh capacity additions this year, underperformance at existing major mines means mine output is now forecast to average 15.Mt (+160Kt YoY), which is significantly lower than the forecast for global demand to rebound by 5.4% YoY (+955Kt).
    Yet in China, refined copper output is expected to continue rising after recovering in April to 380,000 tons, a four-month high. Similarly, in Chile, copper mine output increased by 6.4% YoY to 455,000 tons in April 2010, according to INE, Chile's statistics institute. Chile produces about one-third of the world's total copper mine output. In addition, Codelco reported that authorities had approved the environmental impact study for an open pit project at El Teniente - the world’s largest underground copper mine. In 2010, El Teniente would produce 363,000 tons of copper-in-concentrate and 12,000 tons of EW cathode.
    In Australia, BHP Billiton has affirmed that its Olympic Dam copper-gold-uranium mine should return to full production by July 2010. Output had been reduced by 75% following an accident last October. The mine produces 1% of world copper. Meanwhile, Xstrata has suspended an exploration program in north Queensland worth $26M as a result of Australia's proposed 40% mining tax.
    In Saudi Arabia, Citadel Resources announced that the Exploitation Licence for their Jabal Sayid copper-gold project had been granted.   Jabal Sayid would be Saudi Arabia’s first base metals mine and it is expected it to start-up in 2011 and produce 60,000 tpy of copper-in-concentrate at full capacity.
LME copper stocks have decreased by 5.5% this month to 476,725 tons.

    In London, the tin settlement price rose to US$ 18,105 per ton with a contango of US$ 90 on the 28th of May 2010.
   The tin market remains in robust health. While prices have fallen over the past month, they have not done so to the same degree as the rest of the complex. First and foremost, LME inventories continue to decline   at 20,060 tons, stocks are down 22% YTD, and are still pointed downwards. Second, these draws are supported by continued firmness in physical market premiums and reports on demand. Moreover, domestic demand appears well supported by strength in production of electronic products as well as tinplate usage. The third pillar of support comes from the supply side of the market. The latest export data for Indonesian refined export in April did show a 30% year-on-year increase to 7,900 tons, although YTD exports are currently down 4,100 tons (12.8% YoY). Better weather has supported this improvement, as has increased export demand from countries such as Singapore. Moreover, the only new tin mine slated to come online for the next few years - Piriquitas in Argentina - has now downgraded tin-in-concentrate production for 2010 to under 400 tons, compared to 900 tons previously forecast and a planned annual capacity of 2,500 tpy.
    ITRI's International Tin Conference held this month in Vancouver confirmed the general up-beat sentiment about the current state of market fundamentals - although this was tempered by concerns about the possible negative impact of the Euro zone financial crisis. The keys points were:
•         China continues to provide massive support to tin and other metals markets.
•         Tin consumption has bounced back in 2010.
•         Investment in new mine capacity is patchy.
•         Artisanal mining and "conflict minerals" remain in the spotlight.
    In Indonesia, authorities have threatened to revoke Koba Tin's mining license for allegedly mining in protected forest areas. Although Koba accounts for only 2% of world tin output, this highlights the continuing pressures on tin mining operations in Indonesia, in a market that can ill afford to lose supplies, with production in China struggling to meet demand.

    In London, the Gold P.M fixing closed the month positive at US$ 1,207.50 per ounce on May 28th, 2010 (MTD: +2.40%, YTD: +11.03%), while Silver ended the month slightly negative at US$ 18.53 per ounce (MTD: -0.48%, YTD: +9.06%). 
    The market's main focus this month has been debt woes in nations such as Greece and Spain. At the midst of the month, gold and silver prices hit an all-time high, boosted by safe-haven buying, as demand surged to the highest level since the collapse of Lehman Brothers in 2008. Gold AM peaked at US$ 1,241.25 on May 12th surpassing the previous record set in December last year, while silver climbed at US$ 19.64 on May 14th.
   On the demand side, European investment demand was exceptionally strong and is expected it to remain so in the rest of the year driven by jewellery demand in India and China and investment demand in Europe and the US. Global gold jewellery consumption rose by 43% in tonnage terms in Q1 to 470.7 tons as India’s demand rose to 147.5 tons from 37.7 tons in Q1 2009.
    Regarding silver, investors bought 209.7 million ounces of silver last year, the second highest buying record in history. This year, investment buying in silver is expected to reach 213.9 million ounces.
    On the supply side, Kazakhstan could boost gold production by up to 75% in 2011 after the launch of a new plant at the largest gold deposit in the country. Kazakhstan today produces over 20 tons, and targets to emerge at a level of 35 tpy. Kazakhstan holds approximately 4% of world gold reserves and ranks 7th in the world in terms of reserves.
    In Peru, Newmont expects to open its Conga gold mine in late 2014 or late 2015 and would need between $2.5 billion and $3.5 billion in investments to bring the project into production. Conga has reserves of about 12 million ounces of gold. In the first five years of operation, the mine should produce between 650,000 and 750,000 ounces of gold.
    Globally, gold mine production was 9% lower in the first quarter, with production at Grasberg in Indonesia, the world’s largest gold mine, falling 25% because of lower ore grades.
    On silver supply, Mexican miner Fresnillo expects its silver output to rise 71% through 2018 to 65 million ounces from 38 million ounces this year. Globally, silver mine production climbed 0.3% to 553.9 million ounces in 2009, and is expected to rise about 5% to 581.2 million ounces in 2010. In 2009, Peru was the largest silver producer at 123.9 million ounces, followed by Mexico.

    In London, Nickel tumbled by over 16% to US$ 21,555 per ton per ton, with a contango of US$ 95, on the 28th of May 2010.
    Nickel prices, in common with the rest of the complex, have suffered extreme gyrations over the past month. Having peaked at $27,000 per ton at the end of April, the highest level since May 2008, momentum has since lurched to the downside. Despite a continuation in the generally supportive nature of fundamentals - firm premiums, declining LME stocks and widespread evidence of OECD stainless sector revival - the price signal has been dominated by the European debt crisis, which has reawakened a level of uncertainty. In fact, latest data from the International Nickel Study Group has reiterated the strong bounce back in global nickel demand during early 2010 as stainless steel output reached all-time highs. According to the INSG data, estimated nickel usage rose 33.3% YoY, entailing an implied deficit between supply and demand of 8,200 tons in Q1 2010. It appears likely that the nickel market will remain in deficit for as long as Vale Inco remains on strike and the stainless steel market stays strong.
    In Australia, Mincor Resources will restart operations at the Miitel nickel mine and ramp up to full production at 4,500-5,500 million tpy of nickel ore in July, while BHP Billiton has already restarted its mining operations at the Nickel West Leinster complex a few weeks after it suspended the works on 11 April due to a fatal accident.
    In China, Jinchuan Group has shut down a nickel furnace in Gansu province for 140 days for repairs. The furnace produces nickel matte, a semi-smelted material used for refined nickel production.   The smelter produced the mattes for more than 60,000 tons of refined nickel last year, nearly half of the company's output.
    In Madagascar, Sherritt has delayed its start up of its Ambatovy Nickel Project. The $4.5 billion pressure acid leach operation (PAL) was initially planned to start-up this year but has been postponed to January 2011 on the back of weak nickel prices. The company is expected to reach first commercial production in 2011 followed by a 4 year ramp-up to full production of 63,800 tons of contained nickel.
    LME nickel stocks have decreased by 5% to 138,504 tons at the end of the month.