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By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
CHINA ANNOUNCES ITS INITIAL RELEASE OF NATIONAL METAL RESERVES
This afternoon, China’s National Food and Strategic Reserves Administration announced the quantity and timing of the initial release of copper, zinc and aluminium into the market, with 20,000t, 30,000t and 50,000t reported to be sold in open auction between 5-6th July. This news is likely to be welcomed by the market, as it signals not only increased transparency, but also has taken the sting out of forecasts expecting the release of inventory to be used purely as a price shocking mechanism. Indeed, given this ’batch’ release, we can see that compared to the average monthly level of Chinese consumption (over this year), 2%, 5.5% and 1.5% of copper, zinc and aluminium is being added to the market this month.
LME 3M INTRA DAY COPPER, ZINC & ALUMINIUM PRICES
Source: Bloomberg
However, given that market forecasts appear to have underestimated the quantity of zinc being introduced into the market this month (expectations were at 20,000t), yet appear to be roughly in line with expectations for aluminium, we certainly could expect to see some price volatility between the different metals. In the case of copper, initially we were expecting that the release of inventory could be more of a threat; than reality, given copper’s difference in fundamentals (compared to aluminium and zinc which face tighter markets); however, with this not being the case, it certainly leaves room for prices to come under further pressure this year. This is especially important as we believe that copper’s price (over much of this year) has been overinflated as a result of positive speculative sentiment regarding copper’s future use in the green revolution, rather than current underlying fundamentals.
However, the bigger question remains, just how long (and what total quantity) of these base metals will be released this year. As it stands, we have adjusted down our estimates for the total quantity of copper, zinc and aluminium in reserve, with copper forecast at 2Mt (just over two months of Chinese consumption), 250,000t of zinc (just under two weeks’ worth) and 850,000t (just over a weeks’ worth). However, we don’t anticipate in any of these cases that all reserves will be released. Therefore, if we assume that there will be similar monthly releases of inventory over the year (although we suspect in reality that the frequency will be much less), then a total of 140,000t, 210,000t and 350,000t of copper, zinc and aluminium could be added to global supply this year. In this scenario, while this would inflate the current level of surpluses we have for zinc and aluminium, in the case of copper, it could move the market significantly closer to a surplus market this year, further weakening the bullish rhetoric that copper has enjoyed year-to-date. Given China’s upcoming celebration to mark 100 years of the Communist Party in July, its worth watching out for any further transparency on the matter going forward.
| Initial Release (t) | % of 2021 Chinese Monthly Demand (Average) | Expected SRB Total Capacity (000t) | Monthly Release (annualised) (t) | |
| Copper | 20,000 | 2.00% | 2,000 | 140,000 |
| Zinc | 30,000 | 5.50% | 350-250 | 210,000 |
| Aluminium | 500,000 | 1.50% | 800-900 | 3,500,000 |
Source: Bloomberg, SMM, StoneX
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