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Fairfax Market Report Including IFM, MDM Engineering and others

Last updated: 11:22 15 Jul 2010 BST, First published: 10:22 15 Jul 2010 BST

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Morning View

Miners lead FTSE lower as caution leads markets generally lower
•    Eurozone and US negative growth expectations are of concern
•    Baltic Dry Index fall is related as much to the delivery of new ships and oversupply in the market for bulk carriers as growth in demand for bulk carriers struggles to keep pace with the supply of new vessels.
•    Chinese data looks good but recent comments out of China indicate continuation of policy tightening which in turn suggests a slower H2.  Note that we should look at what China does and not what they say as a rule.
•    Base metals prices appear to gain from an expectation of lower interest rates in the longer term.  Slower Chinese growth still indicates growth in demand for copper at a time when mine grades are generally falling.
•    The potential for a bank collapse in the Eurozone is of grave concern although the ECB is likely to rescue key institutions and to avoid the mistakes seen over the Lehman collapse.

South Africa – unions and government meet with platinum miners over fatality issue
•    A recent spate of fatalities in the platinum mining industry has crystallised developing concern within unions and the government over the issue of mining fatalities.
•    South Africa probably leads the world in terms of coal mining safety with figures that are broadly comparable with the London Underground.
•    But underground platinum and gold mines are a far greater challenge from a health and safety perspective.
Conclusion:  platinum and gold mines are likely to see rising costs, capital requirements and potentially lower production levels to accommodate more stringent safety practices.  Platinum prices are likely to rise further as a result.

Economic News
China - The Chinese economy expanded 11.1% in the first half compared to the same period last year. The April-June quarter growth slowed moderately to 10.3% from the preceding quarter's 11.9% expansion. This number was slightly down on forecasts of 10.5%. The figures show clear signs of a slowdown in the economy, the result of a withdrawal of stimulus since late 2009. Export gains may have prevented a deeper slowdown in GDP in the second quarter
•    Retail sales rose 18.3% in June from a year earlier and Producer-price inflation cooled to 6.4%
•    In June, industrial output grew 13.7%yoy, with the increase shrinking from the 20% level seen at the beginning of this year.
•    Baoshan Iron & Steel Co. the Chinese steelmaker, cut prices this week highlighting the weakness in industrial output.
•    Power generation expanded at the slowest pace in four months. Power output grew 11.4%yoy the slowest growth since the February’s 7.9% expansion.
•    Demand for fuel fell. Crude Oil processing rose at the slowest pace in 8 months.

US – The Federal Reserve has cut its growth forecast for 2010 to between 3.0 - 3.5 from the 3.2-3.7 forecast in April. Officials have also predicted that expansion will be to slow to return the country to full employment for at least two years.
•    A surge in imports from China increased the US trade deficit in May by 4.8% to $42.3bn
•    The White House Council of Economic advisors estimates that the economic stimulus legislation introduced last year will encourage US$ 280 billion of investment in private industry and local government a report yesterday stated.
•    Retailer’s sales fell in June for a second month in a row.
•    Labour Department report yesterday showed that the prices of goods imported into the U.S. fell in June by the most since early 2009, led by declines in the cost of oil, business equipment and consumer goods. The 1.3% drop in the import price index was more than projected and followed a revised 0.5% decline in May.
•    Further data showed that Inventories increased at the slowest pace of the year highlighting that many companies are reducing stock levels in preparation for a cooling sales environment. Stockpile replenishment added 1.88 percentage points to gross domestic product in the first quarter, down from 3.79 percentage points in the last three months of 2009

UK - Unemployment in the UK fell by 34,000 to 2.47m in the three months to May. Data showed the unemployment rate was 7.8% of the workforce, slightly better than expected. This compares with 10% in the euro zone and 9.5% in the US. The number of people out of work for more than 12 months was up by 61,000 to 787,000
•    Average weekly earnings eased to 2.7% in the three months to May from 4.1% in April. Excluding bonuses, earnings rose by just 1.8%.

Europe – Industrial production figures released yesterday showed that output rose 0.9% in May less than the 1.2% forecast.  The spread in production between the “core” and “peripheral” economies slightly distorts the figures. Germany grew 2.9% in comparison to Span’s contribution of 0.3%
•    Inflation fell from a 17month high of 1.6% in May to 1.4% in June. The fall was attributable to lower energy prices. Underlying inflation which excludes energy and unprocessed food prices, remains at 0.9%

Spain – Banks borrowed a record 126.3 billion euros (US$161billion) from the ECB in June as investors avoided the nation’s debt ridden institutions. The Bank of Spain stated that Spanish banks increased borrowing by 48% from May, in contrast to ECB figures showing that a drop of 4% was seen in borrowings in the rest of the Euro Zone.
•    The country will today try and sell as much as 3billion worth of debt before facing its largest debt maturities.

Currency – The yen rose against all its major counterparts on the back of the poor data released in the US and China. The dollar fell for a second day against the Japanese currency as the “curtain of gloom” hanging over the US economy returned. The Australian and New Zealand dollars also fell on the back of the Chinese growth figures on worries that export demand from the countries will wane.

Commodity News
Precious Metals
Gold US$1,211/oz vs US$1,212/oz – Gold rose in early trading as concerns surrounding the global economic recovery returned.
SPDR gold holdings rose to 1,314.82t (42.272moz) Current value $51,012bn.

Platinum US$1,527/oz vs US$1,529/oz yesterday
Silver US$18.31/oz vs US$17.93/oz yesterday -
Rhodium  US$ 2,400/oz vs US$2,450/oz yesterday -
Palladium US$467/oz vs US$455/oz yesterday –

Base metals
Copper US$6,558/t vs US$6,573t yesterday – Growth figures in China par off against falling industrial figures in the US and push prices higher in early trading but ongoing concerns about the global recovery bring prices back down.

•    Zinjin Mining Group has announced that the Chinese regulator will investigate the company’s disclosure of the acid leak that has hit fish stocks in the Fujian province. The company could face fines in excess of US$59m should the regulator deem that the company did not disclose information on the leak in an appropriate fashion. The plant produces 12,800 metric tons of copper a year, and will only reopen after checks by environmental authorities.
•    The ongoing dispute between Rio Tinto and Ivanhoe Mines over the Mongolian Copper and gold mine (Oyu Tolgoi) has escalated on speculation that Ivanhoe is trying to establish relations with alternative investors in a show of strength. Ivanhoe has been trying to terminate a clause in the agreement formed between the two companies in 2006 that prevents the Canadian company from issuing more than 5% of its shares to third parties. Rio is a minority shareholder in Ivanhoe and is funding most of the Mongolian mine project costs in return for the opportunity to increase its stake in Ivanhoe to 46.7% over the coming year.

Aluminium US$2,002/t vs US$ 2,014 /t yesterday – South Korea has been purchasing premium aluminium at a higher price than a month ago as demand for the metal increased from the Auto industry as sales figures continue to rise.

Nickel US$19,320/t vs US$19,665/t yesterday
Zinc US$1,836/t vs US$1,858/t yesterday -
Tin US$18,175/t vs US$18,075/t yesterday

Energy:
Oil US$76.50bbl vs US$76.66bbl – The softening of the US economic outlook forced prices lower for a second day on concerns that a slowing economy will push demand down. Oil has lost 3.2% this year amid speculation rising supplies in the US signalled a slowdown in consumption.
•    US Lawmakers are attempting to block BP from acquiring new off shore leases on the back of the company’s poor safety record. The embattled company has also started critical pressure tests on the new well cap in the Gulf of Mexico.  
•    Fairfield Energy, the North Sea explorer has cancelled plans for a $500m listing after failing to attract sufficient investor interest.

Gas US$4.318/MMBTU vs US$ 4.365/MMBTU yesterday – Inpex Corp operator of the proposed Ichthys Natural Gas project in Northern Australia has predicted that the project could contribute A$3.5 billion a year to the nation’s GDP. The project is estimated to cost around $20billion with construction taking 5-6years. Inpex is awaiting agreement from partner Total SA and furthermore approval from the government before it can start construction. Ichthys is one of more than a dozen planned liquefied natural gas projects in Australia.

Other.   
Iron Ore – Chinese imports will be cut for the first time since 1998 on the back of the success of the government’s efforts to curb the property market and excessive infrastructure growth. Steel mills are running down inventories having already bought enough earlier in the year domestically to sustain demand.
•    Rio Tinto’s Q2 iron-ore output declined 2% to 43.61m tons the company reported on Wednesday. However overall, production for the first half of 2010 has increased by 15% compared with the first half of 2009

Steel – China, production fell to a 4 month low as companies shut plants for seasonal maintenance and the fall in prices reduced the incentive to produce. Steel prices have fallen 17% from an 18th month high in April.
•    Mexican steel producer Ahmsa has reported that recent Hurricane Alex has reduced its crude steel capacity by 30% since Iron ore and coal mining operations where critically interrupted. The long term impact on mining operations is still being assessed.

Coal- Reports circulating suggest that NTPC, India’s largest power company is looking to purchase coal mines overseas.
•    Resource Generation, the Australian miner yesterday listed on the JSE in an effort to gain access to the South African markets in raising finance for new coal projects in the country.

Company News

Mining:
IFM (LSE:IFL) – Merafe expect to return to profit for H1
•    Merafe a close competitor to IFM has forecast that it expects to return to profit in H1.  The company acts in joint venture with Xstrata on its Lion ferrochrome business in South Africa.
•    Merafe echo comments made yesterday by Sumitomo that production of stainless steel is recovering.
•    Merafe talk of a steady recovery on ferrochrome and the restart of idled furnaces leading to earnings of 7 to 8c for H1 vs a 3c loss yoy.
•    Ferrochrome prices fell for the Q3 benchmark contract but could recovery for Q4 based on news that stainless steel production is expected to grow by around 15% globally this year. 
•    Negative sentiment over European and US demand may hold back expectations for a significant rise in price for the Q4 benchmark but rising demand to date gives a measure of good news in a market which is full of negative expectation. 
•    Stainless steel production tends to move in a two year cycle of growth followed by a Q3 / Q4 slowdown every other year.  The Q4 settlement will be meaningful for producers but today’s report suggests that 2010 may not be so bad for the ferrochrome industry.
Conclusion:  This should be indicate better news for IFM.  Merafe have a similar cost base and cost pressures.  Both companies operate off the same quarterly ferrochrome benchmark contract. 

Mining this week:
IFM (LSE:IFL) – Global stainless steel production may rise by 15% this year (Sumitiomo)
MDM Engineering (LSE:MDM)

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