Base Metal Commentary

Over the past month, the base metal suite appeared to be showing some signs of price stabilisation upon renewed optimism over a H2 recovery in China (given the easing of lockdown restrictions within Beijing and Shanghai). However, given that further spreads in the country are unable to be ruled out, alongside a mixed release of economic data for May, not to mention the increased global concerns of a potential recession (given the more hawkish stance taken by western central banks towards tightening monetary policy), the base metals recorded their largest weekly decline since June 2021 last week, largely ignoring underlying fundamentals which continue to reflect low stock levels and a move towards deficits. 

LME BASE METAL INDEX (W/W % Change)

Source: Bloomberg, StoneX

LME 3M BASE METAL PRICE PERFORMANCE (W/W % Change) 

Source: Bloomberg, StoneX

Update on China’s COVID-19 Cases
While on a nationwide scale China is recording its lowest number of new cases since early February, with its top 50 cities (by economic size) currently holding no widespread restrictions, risks remain to the downside, with any single case reported tending to result in mass testing or neighbourhood lockdowns. Indeed, in Shanghai, despite the recent jump in cases appearing to be under control, testing is required at least every weekend for all residents, with those working in higher-risk industries (such as retail) required to take more frequent tests, keeping confidence muted.  

TABLE OF CURRENT COVID-19 CASES IN CHINA

Please note: Data was updated on 12th June
Source: Bloomberg

A Snapshot of China’s Economic Performance in May 
The release of economic data for China in May has been mixed, with an overall pick-up in activity for manufacturing and services (from April lows), alongside increased trade flows, still battling against a weak property sector and fears of further lockdowns. In addition, although China’s central bank and Government have taken steps to support the economy with higher stimulus and industry reforms (such as the Ministry of Industry and Information Technology citing this week that “extraordinary” measures will be taken to address the diverging profitability between upstream and downstream manufacturers, while individual cities attempt to provide more attractive deals for house purchases), the level of action the PBoC can take in boosting the economy is somewhat limited by actions from western central banks. Indeed, here we allude to fact that while China (at present) is facing less pressure than western economies on the inflation front, there are concerns over the growing divergence between central bank policy, and the impact that this could play on yuan and capital outflows. As it stands, the PBoC left the 1&5 Year loan prime rates unchanged for May, despite reducing the 5-year LPR in April (to help reduce overall mortgage rates). Looking ahead, the path for recovery in China will be dependent on how further COVID-19 spreads evolve and are managed, while the market awaits more concrete economic data in June. 

GLOBAL CPI & PPI COMPARISONS

Source: Bloomberg

KEY CHINESE INTEREST RATES

Source: Bloomberg

 

TABLE OF INDUSTRIAL PRODUCTION, FIXED-ASSET INVESTMENT, PROPERTY & RETAIL SALES

Source: Bloomberg

CHART OF INDUSTRIAL PRODUCTION, FIXED-ASSET INVESTMENT, PROPERTY & RETAIL SALES YTD

Source: Bloomberg

Western Central Banks Move to Tighten Monetary Policy Faster Than Anticipated 
The Federal Reserve – FOMC June Meeting – 14-15th June 
The outcome of the Federal Reserve’s FOMC June meeting saw the federal funds rate rise by 75-basis points, with the promise of more to come. To read the full article by Rhona O’Connell the Head of Market Intelligence for EMEA & Asia please click here. 

The ECB Board Monetary Policy Meeting – 9th June 
•    “We intend to raise our interest rates by 0.25% in July. We expect to increase them again in September. How fast we raise rates after that will depend on how inflation develops”, but a gradual and sustained series of increases is expected. 

•    Inflation is much higher than we want and will stay high for some time; pressures have broadened and intensified, and projections indicates that it will remain “undesirably elevated for some time”.

•    The economy will grow more slowly in the near future, but the conditions are in place for the economy to grow and recover further, based off a strong labour market fiscal support and savings built up during the pandemic.

•    The Asset Purchase Programme will cease as of 1st July. Under the Pandemic Emergency Purchase Programme, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.Future roll-off will not interfere with the appropriate monetary stance.

IN OTHER NEWS

Supply Risks Escalate for Copper 
Copper production within Chile has suffered in 2022, with output down by 7.4% on a year-to-date basis, driven by limited water availability, low grades, and social and political unrest. This week however, upon the decision by state-owned Codelco (the world’s largest copper producer) to shut down its Ventanas smelter in Quintero (following the smelter having been placed on maintenance in early June due to high levels of sulphur dioxide leaking into the surrounding area), supply risks for copper have further escalated. Indeed, as it stands, the decision to close the facility goes against the request of the Federation of Copper Workers (FTC Union) (which groups Codelco employees), after they insisted that the smelter be upgraded. While the closure of the smelter itself will be gradual, it will also require a legislation change, given the requirement of the smelter to process state-owned Enami material as well (please note this includes mining material from small and medium sized projects). The FTC are currently debating what actions will ensue but have threatened a national strike based on a statement released on 18th June, “According to the agreement adopted with the support of our union bases, we will begin to prepare from this minute the national strike in all Codelco divisions”. “Our action will continue as long as the government and the Codelco Board of Directors insist on the closure of Ventanas and do not green light the resources to allow the Codelco smelters to continue as competitive and sustainable units”. Please note, Chile is responsible for over a quarter of global copper output and ongoing supply risks this year within South America have been a key support to copper prices. In our outlook for 2022, we expect total copper production to jump by 2.3% Y/Y, with capacity expansions within China in H2 helping to counterbalance some of the lost production in Chile and Peru, alongside the brining online of new projects.  

Rising COVID-19 Cases in China Limits Imports of Tin Ore From Myanmar
Based on a report from China’s Menglian County (which is situated in the southwest of Yunnan Province), a rise in new cases of COVID-19 (by 10th June), resulted in a halting of imports of tin ore supply into the country from neighbouring Myanmar’s Wa state. Please note here, this import route is responsible for ~ 30% of China’s total tin ore supply and a resumption is unlikely to occur until end-June. 

Something to Keep an Eye On
In the background of the markets, is whether or not there will be any progress made this year towards reducing the historical trade tariffs between China and the United States. Last week, U.S. Treasury Secretary Janet Yellen announced that the Biden Administration was looking to “reconfigure” the tariffs, while on 18th June, President Biden announced himself that talks with China’s President Xi Jinping could occur “soon”, although no timeframe was given. As it stands, the United States has tariffs in place on $300Bn worth of goods imported from China, which on one hand has supported domestic companies in the U.S. (who wish to avoid cheaper alternative products from China), while on the other hand has negatively impacted some parts of U.S. manufacturing, given higher import costs. Market forecasts suggest that while a phone call between the two counterparties could occur as soon as July, an in-person meeting is unlikely to occur until China’s Communist Party Congress meeting takes place in autumn (in which President Jinping aims to take up a third term in office). It is our understanding that both steel and aluminium tariffs will be left unchanged.