Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
THE RELEASE OF WEAKER THAN EXPECTED PMI READINGS ADDS TO HEADWINDS FOR THE BASE METAL SUITE, DESPITE SUPPORTIVE FUNDAMENTALS
The base metals suite is on track to record another disappointing performance this week
(falling by 4.9%), after recording its largest weekly drop since June 2021 last week. The key price driver remains the bearish macro-outlook at present, with growing inflation concerns, ongoing supply chain pain, uncertainty over an H2 recovery within China and a tightening backdrop for monetary policy in the west. Indeed, upon the release of PMI readings this week (which came in below market expectations), the suite remains in the red in morning trading, despite a backdrop of supply concerns in the underlying fundamentals.
LME BASE METAL INDEX 3M PRICE PERFORMANCE (W/W Change)
Source: Bloomberg
SURVEY, ACTUAL & PREVIOUS PMI READINGS FOR MAY
Source: Bloomberg
EUROPEAN PMI READINGS
Source: Bloomberg
EUROPEAN PMI MANUFACTURING READINGS
Source: Bloomberg
UNITED STATES PMI READINGS
Source: Bloomberg
A Snapshot of Base Metals Underlying Fundamentals
The metal in the spotlight this week is zinc, which has seen outflows in LME inventories result in total on warrant stocks falling to their lowest level in 25 years, with squeezed supply resulting in the LME-Cash-3M spread jumping to its widest backwardation since 1997. Indeed, if we look at inventories based on consumption, total LME on-warrant stocks currently stand at less than half a day’s worth of global demand. The market balance for zinc this year has dramatically altered from our forecast in early January, with the Russia/Ukraine war having extended elevated energy prices within Europe past the winter months. As a result of this, we now forecast zinc to record a ~200,000t deficit this year (previously we expected a balanced market), as production within Europe has been lowered because of falling smelter profitability. Based on CRU data, as much as 70,000t of production was disrupted over Q1 (with up to another 120,000t forecast to be impacted over the remainder of the year). Furthermore, within China at present, recent flooding within the Guangxi province has placed up to 8% of total Chinese zinc output at risk, given the impact upon power supplies – we will continue to update you on the situation as it develops.
Please note, LME spokeswoman Miriam Heywood declared that the LME would continue to keep a close watch on price movements as they develop, following the events that occurred in the nickel market in early March (which resulted in the LME closing trading on all nickel contracts from 8th-16th March).
“We note stock withdrawals in the zinc market and are monitoring this closely”. “We have implemented a number of additional controls on LME metals to address a low stock environment -- including a backwardation limit and deferred delivery mechanism -- which are designed to ensure continued market orderliness.”
Other Key Fundamentals Stories This Week
China’s NDRC Step Up Supervision on Coal Prices
Following the dramatic price rise in coal prices last year (due to limited availability), which saw power rationing take place within China, the Government and central bank have taken further steps to increase regulation and price supervision over coal and the cost for coal-fired power plants.
Steps Taken:
- PBoC allocated a further 100bn yuan (in May) to support lending for clean, efficient use of coal (total amount up to 300bn yuan)
- Ministry of Finance announces that import tariffs for coal will drop to zero from May 2022-end March 2023
- Government requires coal miners to increase domestic production
Indonesia May Move Forward to Increase Tin Mining Royalties (will an export ban follow?)
• Indonesia is planning to increase mining royalties on tin from their current 3% level, in order to increase state revenues (based on comments from the Director General of Minerals and coal at the Energy and Mineral Resources Ministry) – please note, no timeline was given.
• Meanwhile, with 98% of all tin ingots exported out of the country, we could see exports of refined tin banned in the future (President Joko Widodo suggested by 2024). If this occurs, we expect to see a similar patten as when tin ore/concentrate was banned in 2009, whereby huge investment may go into the downstream sector (likely solder bars, given that it’s tin’s largest end use). Please note however, 2024 is a re-election year, and in addition, the last time exports of tin concentrate were banned, it took five years for the material to work its way out of domestic exchanges.
Tin Ore Imports into China are Limited Due to COVID-19
• Based on a report from China’s Menglian County (which is situated in the southwest of the Yunnan Province), a rise in new cases of COVID-19 (by 10th June), resulted in a halting of tin ore imports 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 imports and a resumption is unlikely to occur until end-June.
Chilian FTC Union Workers Go on National Strike 22nd June
• The Chilean Federation of Copper Workers (FTC union) will go on a national strike from 22nd June, following the decision by Codelco (the world’s largest copper producer) to close the Ventanas smelter in Quintero (rather than invest in upgrades), following a leak of sulphur dioxide in the area. Please note, the smelter has been on maintenance since early June. Codelco is responsible for 28% of total Chilean output (please note Chile is responsible for over a quarter of global output).
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