By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
The base metal suite recorded its worst quarterly performance since the Global Financial Crisis (GFC) in Q2, following a quarter of prominently bearish macro drivers, from a faster than anticipated rate of monetary tightening, a further spread of COVID-19 within zero-tolerance China and an escalation in geopolitical tensions with Russia. However, as we enter H2 2022, while inflation pressures are unlikely to abate, in addition to uncertainty over the Russia/Ukraine war, the markets will be heavily focused on economic releases coming out of China, with the hope that falling COVID-19 cases in the country will result in a rapid recovery and importantly, a return to physical demand for the metals. Meanwhile, the release of disappointing manufacturing activity within the U.S. and Europe last week placed demand concerns ahead of supply risks for the metals in the months ahead.
LME BASE METAL INDEX – QUARTERLY PRICE PERFORMANCE
BBG MSCI INDEX & BOND INDEX
EUROPE, U.S. & CHINESE PMI MANUFACTURING READINGS
China’s Latest PMI Readings – What You Need to Know
Despite the fact that both the state-produced and independently produced Caixin PMI readings displayed an overall improvement in activity in June (within manufacturing and services), with top line readings rising over 50 (into expansionary territory) for the first time since February, there remains caution that the current rebound (on the back of lockdown reopening) could be short lived. Indeed, if we delve into the figures in more detail, not only are delivery times currently at their highest level in six years, but important new export orders (which reflect external demand), remains below 50 (in contractionary territory). What is clear however, is that Caixin readings outperformed the state produced numbers, which indicates that the best advance came from small firms (which have suffered the most due to lockdowns). Looking ahead, in order to see a balanced recovery in the country, we will need to see a sustained pick up in export orders (which are coming under pressure from a reduced demand outlook in ROW), while a weak real estate market is likely to similarly dampen the forward view. As it stands, the World Bank is forecasting that GDP growth will come in at 4.3% for 2022 (downgraded from its January’s forecast at 5.1%), and far below the Government target of 5.5%.
CHINESE PMI & CAIXIN READINGS
SHFE INVENTORIES YTD
WORLD BANK GDP JUNE FORECASTS
U.S. Manufacturing Activity Disappoints
Key Highlights
• The latest ISM readings have highlighted a slowdown in industrial activity, with manufacturing, new orders and employment in the country coming in below market expectations and extending a decline. Please note, the readings for new orders fell into contractionary territory for the first time in two-years, despite the prices paid figure showing signs of cooling.
• Meanwhile, although personal spending growth in the United States was set to reduce in May, growth dropped to just 0.2% from 0.4% forecast, while the price index for purchases also came in below market expectations, suggesting that we may be at a turning point when it comes to higher spending. (Please note, 5&10Y Inflation breakeven expectations have been in decline since April).
U.S. ISM READINGS
U.S FINAL PMI READINGS
U.S. CONSTRUCTION SPENDING
5&10Y INFLATION BREAKEVEN FALLS ON WEAKER DEMAND PROSPECTS
A Weakening Outlook for European Industrial Activity
Turning to Europe, and similarly to the U.S., the release of final PMI readings in June reflected the headwinds of higher energy prices and falling consumer confidence in the region, with both manufacturing and services posting slower growth for a second consecutive month. In addition to this, the release of Sentix confidence readings (6-months ahead), fell to its lowest level since 2009, as tensions between the EU and Russia escalate with natural gas flows into Europe having remained constrained over the last two weeks. Indeed, Russia has limited the flow of natural gas via the Nord Stream pipeline to just 40% of capacity, which could impact the EU’s target of building inventories up to 90% by November (please note they are currently at 55%). Meanwhile, both CPI and PPI readings for June hit new record levels, strengthening the ECB’s stance for more aggressive rate rises over the year (please note the next monetary policy meeting for the ECB will occur on 27th June, in which the market is predicting a 50-basis point rise).
EUROAREA PMI READINGS
SENTIX INVESTOR CONFIDENCE
EUROPEAN CPI VERSUS PPI
KEY EUROPEAN ENERGY PRICES
Key Fundamental Stories of the Week
Could We See Russia’s Mining Giants Merge?
On 29th June, we established (here) that the UK’s Foreign, Commonwealth and Development Office had placed sanctions on Vladimir Potanin, (one of Russia’s richest oligarchs and CEO of MMC Norilsk Nickel PJSC, the world’s largest producer of nickel and palladium), as a result of supporting Russia’s Government (by snapping up assets from owners leaving Russia). As it stands, the impact to nickel (and copper) has been marginal, with the LME 3M price for both metals having continued lower in the days following (being guided by the above bearish macro drivers). While we understand that the UK itself is not a big player in the global markets for Russian nickel and copper (please note, the UK’s consumption of nickel and copper stand at >1% of the global market, with the majority of Russian material instead headed for the EU or China), the UK is home to the London Metal Exchange (LME).
What do we Know?
There remains uncertainty if sanctions placed on Mr. Potanin will automatically transfer to Norilsk Nickel, with a spokesperson for the company (at a conference on 29th June), stating that the company was not under sanctions, although its lawyers were studying the impact of “personal sanctions on our president and major shareholder”. Meanwhile, in a surprise move, Mr. Potanin announced on 5th July that he is ready to discuss a potential merger of Norlisk Nickel with United Co Rusal International PJSC (Russia’s largest aluminium producer). Mr Potanin said, “We received the proposal from the management of Rusal to discuss the merger with Norlisk Nickel as an alternative to extending the shareholder agreement”, “I sent a letter in which I confirmed our agreement to start the process of discussing a merger with Rusal”. Please note, Mr. Potanin controls 35% of Norlisk Nickel.
We will continue to update you on the developments with these current UK sanctions and the implications for nickel and copper, but please note, the LME are currently “looking into the detail of the sanctions and what it may mean for the LME, its participants, and Norlisk brands”.
NICKEL & COPPER 3M LME PRICES (INTRA-DAY)
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Natalie Scott-Gray, StoneX Senior Metals Analyst, explains how Indonesia's tightening control over mineral exports, China's upcoming Politburo meeting and new carbon regulations are reshaping the outlook for nickel, aluminium, copper and other base metals. She discusses why supply-side risks may prove more influential than broad stimulus expectations during the second half of the year.
Copper prices are back in focus as physical supply tightens, inventories decline and demand strengthens. Natalie Scott-Gray, StoneX Senior Metals Analyst, explains why the copper market is becoming fundamentally tighter, how Section 232 tariff uncertainty and China's buying patterns are reshaping global flows, and why AI, electrification and grid investment continue to support the long-term outlook despite recent weakness in technology stocks.
Indonesia's tightening grip on mineral exports is becoming one of the most important supply-side drivers for global metals markets. As export controls expand and nickel production quotas are reviewed, supply constraints may outweigh demand uncertainty during the second half of the year.
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