Commodities Comment:Assessing the room for Chinese steel and aluminium exports

　　The statement issued by Chinas MIIT last week made the government stanceon exports from industries with overcapacity quite clear  high levels ofrefined metal exports to emerging regions will not only be tolerated butactively encouraged. But is there scope to absorb Chinese exports at thelevels projected We assess the key areas where this material may betargeted, and their medium-term demand potential for both steel andaluminium.

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　　Hedge funds have never been shorter gold, according to CFTC data releasedon Friday. The Managed Money category of futures investors on the Comexexchange were net short 13,556 lots as of 21 July, equivalent to 42t. That wasup from 1,123 lots net short the previous week, the first time this category hadgone net short in its nine year history. That said, the wider non-commercialssub-category, which is an aggregation of Managed Money and OtherReportable, remains net long, due a to 41,835 lot net long in the OtherReportables category. Furthermore, this wider category (for which data isavailable back to the 1980s) has been far shorter historically (the nadir was anet short of 88,363 lots in April 1999). A final complication, however, is that inthe last ten years there has been a substantial rise in long-only indexinvestors accessing the futures market, and as these are sometimes classifiedin the non-commercial or even Managed Money categories, truespeculators are probably shorter than indicated.

　　Brazilian iron ore exports reached their highest run rate YTD in the weekending 26 July, preliminary port data shows. On a smoothed 3WMA basis,this represents a run rate of ~400mtpa (using historical adjustment factors forship throughput), versus a run rate of ~340mtpa in 1H15. While 2H tends tobe seasonally stronger for Brazilian exports, it is also up 15% over the sameperiod of last year. This pickup helps to explain the bounce seen in Capesizedry bulk freight rates, with the timecharter average up 54% since the start ofthe month (or over $5,000/day).

　　World #2 copper mine Grasberg once again finds itself without an exportlicense after its previous permit expired on 25 July, according to MetalBulletin. Despite operator PT Freeport Indonesia successfully persuading theauthorities that copper concentrates do not constitute unprocessed ores,and thereby avoiding the outright export bans in place since January 2014 fornickel ore and bauxite, permitting for copper concentrate exports wassuspended for a few months last year and continues to apparently be used asa lever by the government during talks over the mines future. Reuters laterquoted on Monday a government official as stating that the Mines Ministry isready to extend the export license for six months, up to a limit of 775kdmt ofcopper concentrate. A Freeport spokesperson said they expect the nextshipments to take place this coming weekend.

　　Vedanta Resources has commenced pre-stripping at its Gamsberg open pitzinc mine project in South Africa, and reports that the mine is on track toproduce its first ore in 2018. The material mined is to be sent to thecompanys Skorpion refinery in Namibia, and is expected to amount to~150ktpa of zinc-in-concentrate by 2020, partially replacing the companysLisheen operation which is set to close this October.