Sentiment in the metals markets has been poor mainly as a result of the slowdown in Chinese growth, which, in turn, seems to be prompting a combination of destocking and “hand-to-mouth operating”, according to international derivatives broker Sucden Financial’s ‘July 2015 Quarterly Metals Report’.

The report notes that the low growth in Europe and the uncertainty over Greece have not helped either, but says there may well be a relief rally now that a solution has been found.

The March–May rallies have mainly been unwound as aluminium, nickel, zinc, copper and tin are all extending below their March lows. Prices are still working lower because the market feels it is in an oversupply situation.

The report notes that lead is still above its first-quarter lows but continues to descend.

“Looking forward, we expect a combination of structural changes to tighten supply in zinc, lead and nickel, while lower prices are likely to prompt supply cuts in aluminium. The low prices could also prompt producer restraint in the other metals before long, particularly in the tin sector and among secondary lead producers,” states Sucden.

On balance, the path of least resistance is to the downside; this may well remain the case throughout the summer slowdown. However, supply responses, either through mines reaching the end of their life or because low prices prompt production cuts, are likely to firm up the fundamentals moving deeper into the second half of this year.

Additionally, the company feels that destocking can only “last so long” and, given the recent manufacturing Purchasing Managers Index (PMI) data, Sucden is not “too gloomy” on the demand outlook, even in China.

Aluminium

Sucden notes aluminium prices remain volatile but that the overall trend is to the downside.

“Prices spiked higher in April–May, but collapsed in May to set fresh lows for the year; the weakness continued into June. The rapid drop in physical and warrant premiums sent buyers into destocking mode, which meant there were fewer buyers around.”

The report explains that this had a “crushing effect” on the all-in aluminium price, with premiums and LME benchmark prices falling. Tightness in the spreads when the shorts rolled made financing difficult, which, in turn, boosted availability.

The company is of the view that the market is now likely to return to a more “normal situation” but the market may well not recover until stocks drop to manageable levels.

Copper

The report highlights that copper prices remain stuck in a downward channel and, after bottoming out at $5 339.5/t in January, they climbed to $6 481/t in early May, but once again have trended lower over Greek and particularly Chinese consumer confidence worries post the rout in the local equities market.

“Reports of impending supply pick-ups are also depressing factors in the market. Still, the forecast supply surplus is not too large and there have been production disruptions, such as in Zambia, owing to power rationing.

“Greece has also dampened sentiment but we expect little fallout from the saga. Falling exchange stocks are providing some room for optimism in the weeks and months ahead,” the report states.

Lead

Sucden points out that lead rallied into the start of the second quarter after becoming oversold, gaining from short covering when “longs piled in”.

However, the company highlights that this was another false start as the metal has retreated to consolidate.

“Despite failures to hold onto gains, lead remains relatively bullish in the medium term, thanks to its industrial uses. With signs of improving global economic momentum, end-use looks set for growth.”

The report adds that slower mine production growth towards the end of 2015 could tighten supply just as the market enters its seasonally busiest period.

“We expect the first deficit in seven years this year, which should lift prices as availability tightens,” Sucden says.

Nickel

Further, the report points out that nickel prices spent most of the second quarter of this year oscillating sideways and above the April low of $12 146/t.

Sucden states that the market is waiting for Indonesian ore stockpiles at Chinese ports to drop to the extent that it “chokes off” much more Chinese nickel pig iron production.

“Separately, tightness developed in Shanghai Futures Exchange
(SHFE) nickel as there was a shortage of brands that could be delivered against the nascent SHFE nickel contract, causing a squeeze on the SHFE that helped to underpin stronger nickel prices.”

The report explains that, when Norilsk brands were made good for delivery, SHFE nickel prices collapsed, taking LME prices with them.

In late June, nickel spiked lower to $10 795/t before rebounding to $12 000/t and subsequently falling prey to the aftermath of the Chinese equities debacle.

Tin

Meanwhile, Sucden says tin’s fundamentals are bearish as supply continues to grow after many years in which it was restrained by a lack of new mines.

China’s opening up of the metals industry in Myanmar has created a fresh source of supply to the market that China is processing to the extent it has become more than self- sufficient and can even export material again.

The report explains that this has happened while demand is weak, as these factors have made it difficult for Indonesia to regulate supply to the market.

“Low prices make it difficult for producers to limit exports because they need the cash flow these generate,” Sucden points out.

Zinc

Moreover, the report highlights that zinc has repeated its 2014 run-up-and-stall performance, with prices rising to $423.5/t in the March–May 2015 rally, only to drop to $440/t subsequently.

“A stronger supply and demand balance looms but may be slightly delayed as producers change their plans. Nonetheless, the stronger outlook should underpin prices and eventually lead to another buying opportunity,” the report concludes.