BASE METALS FORUM: US-China trade war a major cause for concern for market participants

Held on Thursday July 12, market participants focused on the effect of the trade war and the fundamentals of the policy-driven and volatile aluminium market.

“We have seen a decline in base metals in response to the US [Section 232] tariffs recently, [and while it will have a limited impact in the short term], the trade war will have a [negative] long-term effect,” said Citic Stocks strategy analyst, Peijing Qin. 

Fueled by threats of further tariffs – equating to $200 billion in Chinese goods – base metals prices have retreated, with investor sentiment continuing to dwindle.

For example, the three-month copper closing price on the London Metal Exchange fell to $6,190-6,192 per tonne as of July 12, down from $6,835-6,837 per tonne on June 19 when the US introduced the tariffs on Chinese goods. 

“US sanctions on UC Rusal shut the door for those [aluminium] importers, which forced them to turn to the Chinese market,” according to analyst Xizhi Yao of the Chinese metals information service Antaike.

China exported 485,000 tonnes of aluminium products in May, a 5.4% month-on-month increase from 460,000 tonnes in April, according to Chinese customs data released on June 12.

Aluminium fundamentals
“Aluminium is one the most policy-connected base metals. For example, domestic aluminum smelter profits surged by 29.3% year on year in 2017 thanks to the supply-side reform that focused on capacity cuts that year,” Yao said.

China’s supply-side structural reform, as part of the nation’s Five Year Plan, was initiated by the country’s president Xi Jinping in 2015, and the phasing-out of excessive capacity in the non-ferrous metals industry started in late 2016.

“For 2018, we expect [domestic] aluminium consumption growth to be [slower] than expected,” Yao said. “It’s the same case for capacity ramp-ups, partly due to credit squeezes, so it’ll remain in a tight supply and demand balance in China.

“However, overseas consumption will be still robust and their supply deficit will persist,” Yao added.

He added that current domestic alumina stocks will be sufficient for 17-18 days consumption, “which is three-to-four days higher than last year.”

The aluminum supply deficit outside China is estimated at around 1.5 million tonnes for 2018, down from 1.86 million tonnes in 2017, according to Antaike.