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Sucden Financial’s head of research, Daria Efanova, said at the company’s third-quarter metals webinar, “We continue to pay attention to the Beijing story and stimulus in particular.” She added that “we have seen some recent upside in base metals, supported by the release of stimulus measures by China. The Politburo meeting last week, especially, really propped up confidence.”
Efanova noted that specific policies have been directed toward the supply side, with not much intended to prop up demand, especially in the consumer sector.
“Confidence remains low, which remains a key detriment to consumer spending,” she said. “So while positive news keeps propping up prices on the day, when they test those resistance levels they fall back down. So we’ll continue to see the effects of the stimulus… in the real economy.”
China demand has been a dominant theme for base metals so far in 2023, and it was a key focus in Sucden’s first-quarter and second-quarter webinars earlier this year.
On a year-to-date basis, zinc remained among the poorest performing base metals, Efanova said, with the price falling by 20% and weakening significantly in the second quarter, although that downside momentum stalled in July.
The three-month zinc price was $2,482.50 per tonne at the 5pm close of trading on the London Metal Exchange on August 2, compared with $3,002 per tonne at the start of the year. This was linked to lower demand from the construction sector.
“Demand weakness plus increased mining supply really helped to push prices lower during the [second] quarter. We saw stock levels on the LME rise quite sharply over the quarter,” she said.
Zinc stocks totaled 97,925 tonnes on August 3, compared with 30,475 tonnes at the start of the year.
Despite zinc prices falling quite significantly, we continue to see a threat to European smelter production, especially in the fourth quarter.
“Despite zinc prices falling quite significantly, we continue to see a threat to European smelter production, especially in the fourth quarter,” Efanova said. This was despite the falling price of natural gas, which has kept profit margins low.
“Only 20% of smelters can produce above the cost of production,” Efanova said. “With policy support remaining marginal, we expect zinc prices to remain low in the third quarter.”
On aluminium, Efanova said that, in line with the other base metals, the light metal’s price fell by 11% over the second quarter, having felt the brunt of central banks’ policy decisions, because it was “the most macro dependent metal.”
“It remains true that the lower demand outlook and the central banks have really affected base metals overall,” Efanova said. “Aluminium, being the most macro dependent metal, has really felt the brunt of the central banks’ [actions], despite the US economy remaining robust from the labor standpoint, and even [on the] consumer side. We continue to expect central bank activity to affect aluminium in the third quarter.”
In China, despite smelter restarts in Yunnan province, maintenance outages in other regions outweighed the gains, while the threat of drought still posed a risk to capacity.
“We expect operating capacity to come back online again, thanks to Yunnan smelters coming back into the market, but it won’t be enough to drive sustainable gains from the supply side on a year-on-year basis,” Efanova said.
She added that the energy situation was still a key factor in China, with the risk of drought when the weather became hot once more.
“We have seen rationing be implemented at key aluminium smelters to preserve energy,” she said, adding: “We remain cautious of history repeating” – referring to the 20% of output that was lost in the Sichuan region in August 2022.
“The demand side outlook [is limiting] the upside gains we could have seen in supply,” she added.
“The market was a bit impatient with Chinese support,” Efanova said. “When we have seen positive news out of China, the gains were not sustainable. And until the market sees sustainable recovery and economic growth in China, we will struggle to see a long-term fundamental shift higher, especially on aluminium.”
In line with copper, she added, “We are wary of supply risks. But with demand being so muted, we expect a quieter third-quarter performance.”
Despite the mixed picture on stimulus and economic recovery, demand for copper concentrates was picking up in China, Efanova said. Ore imports into China continued to grow rapidly, by about 20% month on month in April, which saw treatment charges rise to more than $90 per tonne.
Fastmarkets calculated the copper concentrates TC index, cif Asia Pacific, at $88.90 per tonne on July 28, and the corresponding copper concentrates RC index, cif Asia Pacific, at 8.89 cents per lb on the same day, the highest levels since October 2018.
“Copper seems to be quite sensitive to the stories from the macro standpoint and from China,” Efanova said. “Even though demand is quite significantly lower, this hasn’t had a fundamental effect on prices. The spread remains in contango, suggesting that it is not necessarily transferring to the physical market. We believe that the importance of stocks… coupled with a lower demand outlook, is having less of an effect on base metals, and copper in particular.”
Stocks of the red metal totaled 76,875 on August 3, compared with 88,550 tonnes at the start of the year, briefly reaching 100,000 tonnes in early June before falling again.
Elsewhere, nickel and zinc also showed strong downside moves during the quarter, linked to the same factors – China, central banks and construction materials.
“As of now,” Efanova said, “the support level of about $20,000 per tonne [for nickel] is holding firm and the spread is remaining in contango – again, highlighting that demand is not outstripping supply. In particular, the stimulus story and a slight recovery in steel demand are not enough to drive physical tightness.”
Nickel’s cash to three-month price spread was recently in a $205 per tonne contango.
“[Demand for use in the batteries for] electric vehicles remains a key factor in understanding the longer-term narrative for nickel,” Efanova said. “We expect [that sector] to drive an upside gain in the longer term, but for the third quarter [of 2023] we don’t yet see it as feasible, and not sufficient to drive prices higher.”
Supply from China is recovering, Efanova said, with smelters returning from maintenance outages in the third quarter, although this would not result in what she would describe as a “fully fledged recovery.”
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