Commodities Comment:Chinese inventory overhang set to remain a problem over 3Q15

After a week which included what was possibly the last FOMC meeting innine years to keep interest rates unchanged, and US 2Q GDP with majorrevisions to previous quarters, it was a less well known US data seriesthat caused the biggest impact on asset prices. Friday’s Employment CostIndex (ECI) showed total labour costs, adjusted for changes in thecomposition of the workforce, rose just 0.2% QoQ in 2Q, the slowest pacesince records began in 1982. On that the dollar fell 1%, causing gold andother metals to rally strongly, as traders queried whether the Fed, whichsees the labour costs as important and the ECI as a good indicator ofthem, could really raise rates in September as expected given such abackdrop. Some of the moves were faded as economists queried someaspects of the report. Nevertheless it means next Friday’s JulyEmployment report, which provides information on wage growth (thoughnot adjusted for compositional effects), will be more important than ever.

    Hot on the heels of First Quantum Minerals’ copper production downgrade,due to insufficient power supply from Zambian state utility Zesco, came thenews on Friday that power distributor Copperbelt Energy Corp (whichpurchases power from Zesco) had informed miner customers includingVedanta, Glencore and Vale that supply would be reduced by 30% frommidnight that day, local time. Later on Friday, however, it was reported thatthe planned supply cut had been delayed to allow talks to take place amid agovernment intervention. Total Zambian mine output is now (after FQM’sdowngrade) expected to be around 838kt of copper this year, down from ourinitial, pre-disruption expectations of 984kt. We await further details todetermine whether another downgrade to the country will be necessary.

    Antofagasta Minerals and Barrick Gold announced on Friday their agreementfor the former to acquire 50% of the latter’s 120ktpa Zaldivar SXEW coppermine for $1bn. The acquisition will allow Antofagasta to maintain its positionamongst the top ten copper miners to 2020, and we think more importantly,sustain and grow its position in the copper cathode market following theclosure of its Michilla SXEW mine this year and declining output at itsCentinela SXEW mine over the next few years. ANTO will assume operationalcontrol of the asset as part of the deal.

    The latest data from the China Iron and Steel Association shows crude steeloutput from its member mills over July 11-20 to have been 622mtpa