By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
THE BASE METALS TUMBLE GLOBALLY
The base metals have tumbled in morning trading, taking the LMEX base metal suite to its lowest level since 26th April, following the more hawisk than expected outcome of the Federal Reserve’s June meeting, while China continues on its path to reduce commodity prices, arguably with its most serious move to date.
LME 3M BASE METAL PRICES PERFORMANCE (2nd Jan = 0)
Source: Bloomberg
CHINA
Over the last several months, we have recorded China’s attempt to cool commodity prices that have reached
multi-year and even decade highs, boosted by increased demand (particularly from exports), and then further inflamed by global supply bottlenecks and domestic supply concerns from environmental emission curbs (for aluminium in Inner Mongolia) and more recently reduced smelter production in Yunnan (a key production hub for aluminium, tin and zinc) driven by thermal coal and rainfall shortages. Indeed, following the May PPI reading, which rose to its highest level since 2008, concerns have risen not only over reduced domestic demand in the country (with downstream producers delaying restocking), but over the longer-term impact on overall higher inflation if downstream producers then turn to passing on the cost to the consumer. Indeed, this is not just a domestic concern, with China being a key global exporter (particularly during this period of recovery post COVID-19), the risk persists of influencing higher demand outside China. However, given that in July China will be celebrating its 100th year of the Community Party, the increased actions to maintain economic stability in the country have been widely expected; although, we have seen in the last week the most stringent attempts to cool prices and this has certainly resulted in some of the speculative heat being taken out of the market.
PBOC ACTIONS TO COOL COMMODITY PRICES OVER THE YEAR
March State Reserve rumoured to have released 800-900,000t of aluminium
May Five departments including the NDRC and top producers met on 23rd May to address the significant YTD commodity price rises with a focus on iron ore, steel, copper and aluminium. A ‘zero tolerance’ approach will be actioned going forward to anyone who is participating in market manipulation, hoarding or spreading fake news.
NDRC issued an ‘Action Plan’ to deepen reform of the price mechanism during 14th Five Year Plan. Link here.
SHFE increased trading fees for closing positions of some contracts opened on the same day (link here):
June State-owned Assets Supervision and Administration Commission (reportedly) ordered state-owned enterprises to control risk and limit exposure to overseas commodity markets. It is reported that companies have been asked to report their future positions to the Commission for review.
China’s National Food and Strategic Reserves Administration confirms ‘batch’ releases of copper, zinc and aluminium inventory in the market to directly feed downstream producers who have been hit by higher commodity prices. This is the first time China has publicly announced the release of copper from reserves since 2005, and 2010 in the case of zinc and aluminium.
Focusing on China’s attempts to once again have influence on ‘excessive trading’ in order to reduce commodity prices, we can see that the Government has widened its grip in the last week, involving the international markets and not just domestic contracts, although even with increased transparency from firms over futures trading, it will remain highly difficult to separate actions that are purely of a hedging nature, versus what perhaps could be investment led. Meanwhile, with China’s National Food and Strategic Reserves Administration publicly announcing the release of metal reserves (which is the first time in over a decade), China is certainly sending strong messages that they will not tolerate these higher prices. Although it cannot be certain how metal will be released regarding a time frame or indeed if ‘batches’ equates to monthly releases, we suspect at the moment that a total of two weeks worth of consumption for copper could be released, while two and a quarter weeks’ worth of aluminium consumption could be released, with five and half weeks’ consumption of zinc.
THE UNITED STATES
Of course yesterday all eyes were on the outcome of the latest June FOMC meeting, and whether there would be a change in stance towards ultra-loose monetary policy in the future and if recent inflation growth would impact future economic projections.
Outcome of June FOMC Meeting
· Economic Projections Show Higher Growth, While Inflation Expectations Lift
Policy makers have increased their outlook for economic growth this year to 7% from 6.5% in March, largely due to the successful roll out of vaccines, while the level of growth in subsequent years was little changed from March’s levels. However, perhaps the most telling outcome was in the headline inflation reading which was pushed up to 3.4% for this year from 2.4% previously, although readings for 2022 and 2023 again remained little changed. This is a supportive argument for those who stand by higher inflation being transitionary.
JUNE VERSUS MARCH ECONOMIC FORECASTS
Source: Bloomberg
JUNE VERSUS MARCH HEADLINE PCE
Source: Bloomberg
ECONOMIC PROJECTIONS
Note: Amber = no change, Green = Increase, Red = Decrease
Source: Federal Reserve.gov
· Dot-Plot
Six more participants see an earlier move to higher rates compared to the March meeting, with the median among the Federal officials seeing two rate rises by the end of 2023, moving from zero in the last meeting, although no time frame was given.
FOMC DOT-PLOT
Source: Federal Reserve.gov
· Comments from Federal Reserve Chairman Jerome Powell
Jerome Powell mentioned that officials would begin a discussion about the timeframe for scaling back bond purchases, which are currently sitting at $120Bn a month, although we do not forecasts that actions will be taken until next year. However, as a result, the U.S. dollar (which has been making gains since the beginning of the month over rising chatter over tapering) has strengthened overnight, adding further negative headwinds to the base metals.
U.S. DOLLAR VERSUS LME 3M COPPER
Source: Bloomberg
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