By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
THE BASE METAL SUITE TAKES A TUMBLE IN THE FIRST WEEK OF JUNE
The base metal index appears to have succumbed to pressures in the market surrounding concerns over inflation, China’s continued attempts to cool commodity prices and heighted tensions between the United States and China, offsetting (for the time being), metal-specific supply side risks. However next week, upon the release of critical data points out of China and indeed the deadline for Peru’s general election; in addition the highly anticipated announcement from the LME over what the future for the exchange will look like, we certainly can expect some volatility in the markets.
TENSIONS BETWEEN THE UNITED STATES AND CHINA RISE
Despite the last week or so having raised hopes of improved communications between the top two economic powers, following not only the first meeting (under the Biden Presidency) between U.S. Trade Representative Katherine Tai and Chinese Vice Premier Liu He (which was held virtually), in addition to the Chinese Vice Premier holding a meeting with U.S. Treasury Secretary Janet Yellen, it appears that the United States under the Biden Presidency will not be taking a softer stance on China (than under the Trump term), with Mr. Biden announcing yesterday that he has amended a policy set by Mr. Trump back in November 2020. In the amended policy, which originally prevented U.S. companies from investing in certain Chinese companies (related to telecommunications and that had ties to the military), President Biden’s changes this time around appear to have increased their scope of cover. Indeed, the list of companies has increased, with Mr. Biden having placed more defence and telecommunication companies on the list, while a new deadline was set to 2nd August 2021 (with a one year divestment period).
LME 3M BASE METAL PRICE PERFORMANCE (W/W)
Source: Bloomberg
LME 3M BASE METAL PRICE PERFORMANCE
Source: Bloomberg
THE WEEK AHEAD WILL BE TELLING
· CHINESE IMPORT DATA—IS INFLATION HURTING DEMAND?
On 7th June, China will release its May readings for base metal import and export numbers, and we suspect that imports are set to decline on a M/M basis following demand (in this seasonally strong period) having been impacted by high commodity prices (which has seen the April PPI reading jump to its highest level since October 2017). However, as we can see from the chart below, it does appear as though these higher producer prices have yet to be passed onto the consumer, although the risk that they will is increasing. Indeed, in certain cases such as the air conditioning sector, consumers have seen an uptick in prices on a YTD basis. Meanwhile, downstream producers will at some point be forced to restock, and if prices remain at these higher levels, then they could be forced to pass on the higher prices to the consumer. Indeed, if we look at the release this week of industrial profits, while upstream
and midstream companies enjoyed higher commodity prices (with industrial profits for upstream miners jumping 103% Y/Y over Jan-April versus 77% in Q1), downstream producers continue to be impacted (with profits standing at 114% over Jan-April period, down from 158% in Q1).
PPI PRICES NOT YET PASSED ON TO THE CONSUMER—BUT RISKS BUILD
Source: Bloomberg
COPPER’S PREMIUM INTO CHINA (AN INDICATOR OF DEMAND) HAS FALLEN TO RECORD LOWS
Source: Bloomberg
· THE LME WILL RELEASE THE OUTCOME OF ITS DECISION PAPER ON MARKET STRUCTURE
Officially on 8th June (although expectations are that an update on the situation, may be released a day ahead), the LME will release the outcome of its decision paper on market structure, which among other proposals, included a move to close the LME Ring, which would mark the end of 144 years of open outcry trading.
· PERU’S GENERAL ELECTIONS - VOTE 6th JUNE
Supply side concerns are rife in the base metals market at the moment. As we published in the ‘industry update’ section of our ‘Weekly Base Metal Macro Economic’ report on 2nd June (HERE). However, with many of these supply side risks dependent on certain outcomes, one unknown will be answered by the end of the week upon the result of Peru’s general election (to take place on 6th June). As it stands, left-wing candidate Pedro Castillo has maintained a slim lead over his rival Keiko Fujimori, and threatens (if voted into power), to capture more mineral profits to fund social spending in the country, targeting specifically the copper industry. Indeed, Mr. Castillo has mentioned that a new tax could be imposed on copper producer profits, in addition to potential new royalties on mining companies based their copper sales (as proposed in Chile), while renegotiations of tax stability contracts with large companies may take place. Furthermore, Mr. Castillo has mentioned that Peru could undergo a vote for the rewriting of the constitution.
YUNNAN THERMAL COAL SHORTAGE PLAGUES BASE METAL OUTPUT
Delayed and reduced shipments of thermal coal from Australia to China (amid rising tensions between the two countries), in addition to unusually low rainfall (which the State Council reported back in January 2021), is negatively impacting base metal output in the region of Yunnan. In the case of aluminium, reduced smelter run rates (which are set to see a reduction in output of aluminium between 600-800,000t/y), could act as a preventative for further emission related capacity reductions in the country, underpinning a bullish fundamental picture, as demand for air conditioning units soar in rising temperatures. Meanwhile, based on International Tin Association Data, tin smelters have had to close for up to 10-20 days, where 1-2,000t of refined output could be lost, while in the case of lead and zinc, as much as 5-6,000t and 7,500t could be lost respectively.
SHFE AND LME ALUMINIUM STOCKS HAVE DECLINED THIS YEAR
Source: Bloomberg
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