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Read updates below from Sucden Financial’s head of research, Daria Efanova, third-quarter metals webinar.
“Macro [factors] have kind of gone on the back foot in terms of driving the base metals and I think markets will still be focused on copper narratives and where copper is going,” she said.
“Copper was the spotlight of the base metals market in the last quarter,” Efanova said.
“We believe that copper’s upside that we have seen in the last weeks and months has been a key driver in driving base metals prices higher… the correlation with copper and other metals has strengthened significantly, suggesting that the spike that we have seen in copper prices definitely led the rest of the complex higher,” she added.
Speculative positions were the key driver of higher copper prices in the second quarter, Efanova said.
“While the fundamental picture remains somewhat on the tighter side, we’ve noticed that it wasn’t the tightness in the concentrate market or the fundamental side that drove prices higher, it was speculative positions,” she said.
“People tried to create some more upside on the LME and couldn’t do so and … COMEX became a kind of route… to exercise the bullish narrative,” Efanova added.
Market participants will continue to watch the COMEX/London Metal Exchange arbitrage closely in the third quarter.
Sucden’s views on copper corroborate with Fastmarkets Analytics expectations. Fastmarkets analyst Boris Mikanikrezai also believes speculative investments are moving the markets, saying: “With speculators re-engaging on the long side of the copper market after three consecutive weeks of net selling, we believe that copper prices may move higher in the coming weeks, pushing prices higher.
Sucden maintains a bullish perspective on copper but believes prices will struggle on the upside in the third quarter amid weak demand, particularly from China.
Sucden also predict that there will be shortages in the refined market by 2025.
Aluminium prices follow copper prices closely if there is no other fundamental or macroeconomic narrative, as was the case in the second quarter, Efanova said.
“The upside in copper certainly brought appetite that we have not seen in quite a while across base metals, and aluminium certainly followed suit,” she said.
However, with copper and aluminium prices having softened, Efanova expects fundamentals to play more of a role in the aluminium narrative in the third quarter.
“Aluminium is… starting to see fundamental factors creep in… to suggest a less robust tightness in [the] aluminium market,” she said during the webinar.
The resumption of production from aluminium smelters in China’s southwestern Yunnan province has led to near-record production out of China, leading to tightness in the alumina market.
“The alumina market remains [tighter] and LME prices are not quite reflecting that so we expect alumina and SHFE prices to hold slightly better than LME going forward,” Efanova said.
Sucden predicted continued weak demand for aluminium moving in the third quarter.
“The market in China is sluggish, the construction market is still very slow, their output is record high, growth is still slow over there so… it’s very hard to get excited about this,” Robert Montefusco from Sucden’s Industrial Commodities team, said during the webinar.
“Out of the base metals complex… nickel has the strongest fundamental support to diverge from copper,” Efanova said.
Continued increased production from Indonesia makes it difficult to prompt nickel prices higher, Efanova said.
“If we do see some moderate upside from the copper perspective, we don’t necessarily see nickel following suit as strongly as the rest of the base metals,” she added.
Efanova noted the continued dominance of Indonesian material on the market due to its cheaper cost of production in comparison with other countries.
“No matter the price… Indonesian miners will still benefit from the price differential and will continue to pump mined ore onto the exchange [and] into the inventories and as a result we have seen LME stocks continuing to grow,” she said.
Sucden believes that a nickel price below $17,000 per tonne leaves thin profit margins for producers and that a “fair” price for nickel is $17,500-18,500 per tonne.
“It’s very hard to get optimistic about this market just yet… longer term it’s got the capacity to go up to $19,000 or $20,000 [per tonne],” Montefusco said.
“Maybe [if] the Fed [cut rates] and we get another lift in copper again, [nickel] might be dragged back up,” he added.
Fastmarkets analyst Andrew Cole said in his weekly nickel analysis on July 16 that “bearish sentiment continues to overhang nickel, with nickel prices breaking lower last week despite price-supportive developments.” But he added that “we are conscious of being too bearish because we believe the nickel market’s fundamentals are more balanced than prices suggest.”
Zinc prices were somewhat volatile in the second quarter but did strengthen on the upside along with copper prices, Efanova said.
She noted that tightness in the concentrate market and falling treatment charges were challenges for the market, but she believed it was speculative interests that were driving the upside.
“The last time the net position was that high was a couple of years ago and driven primarily from macro and fundamental factors, so to have that dislocation from speculative and fundamentals has been key in driving prices over the last quarter,” she said.
Efanova predicts that in the third quarter zinc prices will be “quite controlled on the upside” with some short-term volatility spikes on the upside due to tightness from the mines and concentrate production.
“The supply is tight but demand… we’re not getting it. I can’t really see too much upside… until probably next year when you see the structure of the market tightening up,” Montefusco said.
Fastmarkets analyst James Moore also sees limited zinc demand. “The underwhelming performance of the residential construction sector in China, confirmed by Oxford Economics’ downward revision of its outlook for the cement, plaster and masonry industries, has prompted us to adjust downward our forecast for Chinese hot-dipped galvanized steel,” Moore said in an analysis on July 16.
Lead prices usually fluctuate with the battery replacement market in China, which is currently off-season, but that was not the case in the second quarter.
“We’ve seen quite robust gains… driven by speculative positioning,” Efanova said. “The price dislocation between spreads and stocks have become quite obvious with prices going higher… and LME stocks growing rapidly.”
She noted that increased stock levels were not necessarily down to increased production because off-exchange stock had been placed onto the LME due to weak demand for the material.
“Interest in lead might be waning slightly from the physical standpoint,” she added. “There’s very little strong narrative to suggest that lead will break out of the range on the upside or downside.”
This view was shared by Fastmarkets head of base metals research William Adams. “Lead prices and activity in the market seemed to have quietened, suggesting that the effects of the summer lull have set in, allowing the market to consolidate,” Adams said last week.
Efanova predicted that LME and Shanghai Futures Exchange lead prices will continue to diverge in the third quarter, similarly to the zinc market.
LME prices are “not necessarily reflecting the fundamental picture,” she said.
“When we do see strong copper upsides, tin behaves similarly, but then after… a possible slowdown in copper, tin tends to continue that upside momentum,” Efanova said.
As tin is a smaller market with fewer market participants, price spikes can be more volatile than the other base metals.
Sucden remains moderately bullish on tin prices going forward due to fundamental factors.
“We see [the] Indonesia backlog in issuing new licenses creating some tightness in the refined and raw materials market,” Efanova said, adding that she predicts that this will impact prices on the SHFE more than the LME.
Sucden predicts tin prices will remain elevated in the third quarter.
“Due to the lack of players in the market, it’s definitely more speculative, rather than supply driven,” Efanova said.
Yet Fastmarkets’ Mikanikrezai believes “tin’s outperformance compared with its complex reflects a marked improvement in the fundamental indicators of the refined tin market.”
“On-warrant stocks are down by 295 tonnes, or 7%, since the start of July, reaching their lowest level since late April,” said Mikanikrezai. “The recent reduction in metal availability signals a tightening of refined market conditions.”
Efanova noted that market participants were less concerned with macroeconomics and more concerned with politics in the second quarter and that this trend would continue into the third quarter.
“As we have passed the UK and French elections, people are now focusing on the US election season… there’s been a lot of uncertainty already taking place… and I think that’s definitely going to be a key driver for our dollar forecast in the coming months,” she added.
“Macroeconomics is playing a less of an important part because we’ve noticed that inflation is softening slightly across the US, Europe and the UK,” she said.
On the topic of interest rates cuts, Efanova said that markets were preparing for cuts in the third quarter of 2024.
Sucden predicts that the US Federal Reserve will cut interest rates by 25 basis points in September and by a further 25 basis points in December.
Sucden also expects interest rates cuts in Europe to be more gradual.
On China, Efanova said that policy announcements from the Third Plenum meetings would have little impact on the base metals market.
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