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Mining Market Summary: Week Ending Friday, May 13

It was a lucky Friday the 13th for dollar investors as the U.S. currency ended the week to May 13 with a flourish. Although Wall Street struggled in the face of weak oil prices, the currency benefited from the release of robust U.S. retail sales data.

The dollar rally came a few days after the Obama administration had taken China to the World Trade Organization for the 12th time. As mentioned in the last Backfill blog (available exclusively to SNL Metals & Mining subscribers), the complaint this time was for tariffs that Beijing has imposed on American poultry products. The move follows numerous disputes over Chinese dumping of iron ore and steel, and the CEO of Cliffs Natural Resources Inc., Lourenco Goncalves, told a steel industry meeting "this is war, not trade" and called for the government "to act accordingly."

Meanwhile, the Chinese government has announced a 5 trillion Chinese yuan (US$770 billion) investment in transport infrastructure over the next three years. The spending program, which is equivalent to almost 7% of China's gross domestic product, caused some confusion as it is not clear to what extent the funding target is new or if it includes previously budgeted projects.

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Emerging markets have recovered over the past few weeks from the turmoil of earlier this year. This trend was confirmed last week by the Institute of International Finance, which estimated an annualized growth rate of 3.4% for these countries in April. Much of this improvement is attributed to a rise in commodity prices.

The recent rally has even swept up the Brazilian real. However, the currency fell last week after a vote by the country's Senate to suspend President Dilma Rousseff for six months so that she can face impeachment proceedings. The Brazilian currency had been strengthening on hopes of Rousseff's removal from office but confidence appears to have waned. Investor sentiment has suffered this year because of the country's sharp recession and various corruption scandals.

On the financing front, today sees the launch, finally, of crowdfunding in the U.S., where platforms will include StartEngine and SeedInvest. American laws were changed more than four years ago to enable investment in private companies by a large number of people — it was already allowed for wealthy "accredited" investors — but implementation has been held up during a protracted review by the Securities and Exchange Commission. The approved rules require businesses to file accounts that have been vetted by an independent accountant.

Another 50-year bond has been issued in Europe, this time by the Spanish government. The bond, with a relatively high yield of 3.48%, raised €3 billion. A similar ultralong debt issue is being considered by Italy.

The growth rate of the German economy is accelerating, rising from 0.3% to 0.7% during the first three months of the year. In contrast, the U.K. economy continues to grow at only 0.4%, being constrained by concern over an exit from the European Union.

The German performance did not dissuade the German financial regulator, BaFin, warning at its annual press conference that low interest rates are a "seeping poison" for the country's banking system. The European Central Bank's policies are dividing opinion between the southern European nations, which have benefited from lower interest rates, and the northern European countries, where savers have been penalized.

The latest data from South Africa suggests that the country's economy remains weak, which may support unchanged interest rates when the Reserve Bank's monetary policy committee meets this week. Unemployment rose to almost 27% in the first quarter, with a net loss of 355,000 jobs. The main culprit was the mining sector, where output continues to fall.

Elsewhere in southern Africa, copper miners in Zambia welcomed parliament's passage of a new royalty regime for the red metal, which will see royalties reduced to 4% for prices under US$4,500 per tonne and to 6% for prices above US$6,000 per tonne.

The World Gold Council announced last week that gold demand had reached a record first-quarter total of 1,290 tonnes, which is the second highest quarterly total. The 21% year-on-year increase was largely due to the highest exchange-traded fund purchases since 2009. The ETF appetite was attributed to investor uncertainty caused by negative interest rates. Nevertheless, physical demand for gold remains weak in the two largest consumer markets, India and China.

WGC's John Mulligan said investors have reacted to market "weirdness," and he described the March quarter as "remarkable." Central banks remained strong buyers, purchasing 109 tonnes in the quarter, and total supply increased 5% to 1,135 tonnes. At 40 tonnes, hedging by producers supported an increase of 56 tonnes in mine supply, although countered by a marginal decline in recycling. Mulligan added that mines are not likely to increase production in the short term.

Goldman Sachs Group Inc. last week raised its forecasts for bullion prices as it scaled back expectations of an interest rate hike by the U.S. Federal Reserve over the next year. The bank increased its three-, six- and 12-month forecasts to US$1,200, US$1,180 and US$1,150 per ounce, from US$1,100, US$1,050 and US$1,000 per ounce, respectively. However, the company's analysts identified a "number of catalysts" whereby gold prices would moderate, including "a more hawkish Fed and ultimately U.S. policy rate divergence." This will correspond, it said, with gradual dollar appreciation over the next three to 12 months.

On the coal front, the Energy Information Administration has predicted the largest annual decline in U.S. production this year since records began in 1949. In its latest Short-term Energy Outlook, the government agency expects coal production this year to fall 17% to 746 million tons, before recovering 4% to 778 million tons in 2017.

With the collapse in U.S. coal production, employment among miners has fallen more than 42% compared with the end-2011 peak. The drop in production accelerated in the first quarter, and S&P Global Market Intelligence estimates that just 173 million tonnes was produced. This is 17% less than produced during the prior quarter and almost 39% lower than the peak quarterly production of 283 million tonnes.

There was a historic moment last week in the U.K., when — for the first time since 1882 — the country was powered without recourse to burning coal. From May 9 to lunchtime on May 15, the U.K. was "zero coal" almost one-third of the time. Falling power prices have made it increasingly uneconomic to run coal-fired power stations when high winds or sunshine boost renewable generators.

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