Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
BASE METALS END THE WEEK ON A BEARISH NOTE, ALTHOUGH RISKS ARISING FROM FURTHER EU SANCTIONS ON RUSSIA COULD TURN THE TIDE
The base metals index is on track to end the week with a muted performance as market sentiment tilts towards a bearish outlook following increased expectations for more aggressive interest rates rises from the Federal Reserve, in addition to newly announced lockdown measures in Shanghai, painting a potentially weaker demand profile ahead. However, given the ongoing tightness in the base metal market, driven by historically low global stocks and the growing threat of further supply shocks from newly announced sanctions on Russia (particularly from the EU), muted price action for the suite, is likely only to be temporary.
LME BASE METAL PRICE PERFORMANCE (YTD)
Source: Bloomberg
LME BASE METAL PRICE PERFORMANCE (W/W) 22nd-14th April
Source: Bloomberg
IMF Hosts Panel Discussion – Federal Reserve Chair Jerome Powell Increases Expectations for More Aggressive Rate Rises
Yesterday (21st April), Federal Reserve Chair Jerome Powell joined ECB President Christine Lagarde and others at an IMF-hosted panel in Washington, in which he stated that a half-point interest rate rise “will be on the table” during the next FOMC meeting over 3-4th May. In addition to this, Powell cited minutes from the March meeting in which he highlighted that “one or more” half-point rises could be appropriate, resulting in market expectations shifting towards at least three half-point rises (and one quarter point rise) this year. This announcement from Powell is arguably the most hawkish that we have seen and comes on the back of U.S. CPI (for March) coming in at its highest level since the early 1980’s. Furthermore, attention will be paid towards any future announcement over the timing of when balance sheet run off will begin (please note in the March FOMC minutes, it was announced that reductions could start at $95Bn/m, with $60Bn in Treasury’s and $35Bn in mortgage-backed securities, phased in over three months - although no formal vote was made on the timeline).
U.S. CPI & CORE CPI
Source: Bloomberg
U.S. DOLLAR JUMPS ON HAWKISH SENTIMENT PLACING PRESSURE ON COPPER
Source: Bloomberg
Chinese Base Metal Demand Disappoints as Further COVID-19 Related Lockdowns Are Announced – Or is Demand Just Delayed?
As Shanghai enters its fourth week of lockdowns, news yesterday (21st April) that stricter measures are to be taken in the city (please see below), have dampened demand expectations for the base metals, which have already recorded a disappointing Q1 performance. Indeed, if we look at import premia into the country for copper and zinc, they have been on a decline since the beginning of the year, while domestic production and in turn, SHFE on warrant stocks, have lifted. However, the question over weather demand will be reduced this year, versus if it is just delayed, is still in the balance. This is especially true given the recent publication from The Ministry of Industry and Information Technology, which published a “Whitelist” referencing the 666 firms in the country that will be supported to return to reliable delivery and production (please note here out of the 666 firms, at least 250 are auto-related). However, given the firm commitment from the Government on sticking to zero tolerance policy in the country, a timeline on just how long current or future lockdowns will last remains unknown. Please note, following the last major lockdown in Wuhan, it took nine weeks for economic activity to return to normal levels.
Municipal Party Committee and Municipal Government of Shanghai – Announcement 21st April
According to the deployment of the Municipal Party Committee and Municipal Government, the city will carry out nine major actions to clear social aspects from April 22, and strive to achieve social zero in the city as soon as possible.
To read this statement in full please follow the link here.
MAP OF CHINESE REGIONS IMPACTED BY LOCKDOWN MEASURES
Source: CRU
CHINESE COPPER IMPORT PREMIUM & PRODUCTION VERSUS SHFE ON WARRANT STOCKS
Type or use Ctrl+Shift+V here to paste source
CHINESE ZINC IMPORT PREMIUM & PRODUCTION VERSUS SHFE ON WARRANT STOCKS
Type or use Ctrl+Shift+V here to paste source
Further EU Sanctions - A Key Risk in the Market
The EU has imposed five main tranches of sanctions on Russia since the invasion of Ukraine, but it is the potential next steps the EU make that is causing concerns, particularly given that current eurozone inflation is running at a record level of 9.8%. Here we specifically allude to the rumblings in the market over whether or not the EU will go ahead with an outright ban on importing Russian crude oil, which makes up 27% of total imports. As it stands, the EU have already vowed to ban coal imports from Russia by August and reduce its reliance on natural gas by two-thirds by year-end; however, there remains no ban on importing Russian crude.
Looking to developments over the last week, we have heard from French Economy Minister Bruno Le Marie calling on the EU to prioritise a Russian oil embargo (reportedly with President candidate Manuel Marcon’s support), “We are trying to convince our European partners to stop importing oil from Russia", "What has been the primary source of currency for [Russian President] Vladimir Putin for several years? It is not gas. It is oil.”. Meanwhile, a report from Germany’s Bundesbank today (22nd April), has highlighted the potential implications an outright energy ban would have on its economy, with a ban on natural gas alone set to take off as much as 5% of GDP this year, stoking inflation and placing the country into recession. Please note, also highlighted in the report, is that industrial users of natural gas would be impacted ahead of supply sent to residential homes. As a result of these concerns, J.P Morgan upped its brent crude oil forecast for year-end to $185/bbl in this scenario.
What Are the Main Implications on the Base Metals?
In this scenario (of which we expect to hear more following the result of the French election on 24th April), it is zinc and aluminium (and to a lesser degree lead) that are most at risk of longer-term volatile price rises, with 20%, 13% and 16% of global production based in Europe. Indeed, both zinc and aluminium smelters (which are high energy intensive) have suffered from poor profitability from rising natural gas prices even before the invasion of Ukraine, and a further rise (or sustained rise) in prices is likely to see output further curtailed. As it stands, as much as 750-800,000t of aluminium and 300,000t of zinc capacity has been impacted since Q4 2021, with expectations of European aluminium restarts now dashed for this year completely. As a result, global market balances for both these metals have been altered since the beginning of the year, with aluminium set to face a deficit just under last year’s record and zinc set to post a deficit of close to 200,000t (from a balance market). In this situation (should it materialise), we forecast that new record high prices for each of these metals respectively could be breached.
5th Tranche of EU Sanctions on Russia Excluded Copper, Nickel & Aluminium
Please note here, that there remains no EU sanctions on the Russian export or travel (via Russian vessels into EU ports) for copper, aluminium and nickel, although it is our understanding that lead, tin and zinc do fall under these restrictions (based on the 5th tranche of EU sanctions on 8th April). (To read the full list of sanctions please see our report from 7th April here). Given the EU’s low dependency on Russian imports for both zinc and lead (with most being either absorbed in the country domestically or exported to China), the impact on price performance was limited for these metals, meanwhile the same cannot be said if copper, nickel or aluminium face future sanctions (please see the EU’s import dependant from Russia for these metals below).
TABLE OF THE EU’S RELIANCE ON RUSSIAN BASE METALS
Source: Bloomberg, CRU, Reuters, StoneX
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