Commodities, and base metal, in particular, closed last week on a strong note, shrugging off China’s weaker-than-expected PMI reading. A softer U.S. Dollar provided support, as did dovish commentary from the Fed’s Jackson Hole meeting.
In a virtual speech to the Fed’s annual Jackson Hole symposium in Kansas City, Federal Reserve Chair Jerome Powell said the central bank could begin reducing its monthly bond purchases this year but will not be in a hurry to begin raising interest rates thereafter.
According to the Fed, the U.S. economy has now met the test of “substantial further progress” toward the Fed’s inflation objective, which would be a precondition for tapering the bond-buying. At the same time, the labor market has also made “clear progress.”
According to Standard Chartered strategists, market concerns over imminent tapering appear to have eased, with traders now comfortable with the idea that tapering may begin this year. Stanchart has lowered its year-end 10Y yield forecast to 1.5% from a previous target of 1.75% previously.
The bank still thinks the Fed will announce a tapering schedule in November and that with concerns around downside growth risks stemming from the Delta variant easing. Meanwhile, real yields remain deeply negative, with gold’s three-month rolling correlation with real yields having stabilized just below 50% while the three-month rolling correlation with the USD having stabilized around 70%.
That said, there’s no question that lockdowns in China have brought about some adverse effects on the markets.
China’s official manufacturing PMI fell to 50.1 in August from 50.4 in July, an 18-month low. Production activity remained quite solid, but demand weakened sharply. Consequently, trade growth may have softened further on weaker demand, port congestion, and easing commodity prices.
China’s Strategic Reserve has been selling quite heavily, with Bureau (SRB) stocks totaling 150 thousand tonnes (kt) on 1 September, composed of 70kt aluminum, 50kt zinc, and 30kt copper.
Thankfully, the modest sales have failed to dampen upside momentum in the commodities market.
Even better: China has lifted its lockdowns. China has started showing signs of a strong recovery after the country reopened its economy.
Here’s how key base metal markets are performing, and how Stanchart expects them to perform in the near future.
#1. Aluminum
Aluminum prices recently hit 13-year highs on the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE) just days ago. Despite the strong price gains, Stanchart sees aluminum prices with an upside bias, with the long tally of supply disruptions in China (see Focus) and rising concerns over the trajectory of future supply growth amid more stringent energy and emissions target reviews.
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In addition to the power shortages in China and policy curbs, the latest disruption to roil the aluminum market this week was the coup in Guinea, the world’s second-largest bauxite producer and largest exporter. China is the key export destination of Guinean bauxite, accounting for 55% of China’s bauxite imports for the
On a regional basis, physical premiums remain elevated on firm demand and the rise in freight costs, with the U.S. Midwest premium hovering around 36 cents/lb through August
and into early September, thanks to the strike at the Kitimat smelter. European premiums stand at an even more impressive 375/t, the highest since February 2015. However, LME aluminum inventories remain quite low at 1.33 million tonnes (Mt).
Meanwhile, SHFE aluminum inventories are the lowest since 1 January, making room for another aluminum rally.
#2. Copper
Preliminary data from China Customs trade shows that August showed further weakness in
China’s copper imports.
Unwrought copper and product imports were down for a fifth consecutive month, and at 394kt marked the lowest monthly import figure since June 2019. They were also down 7% m/m and 41% y/y. Imports for the January-August 2021 period totaled 3.61Mt.
Copper prices have moved lower, weighed down by easing supply risk in Chile following recent mine wage negotiations and softening import demand from China. Two key unions at the 185 thousand tonnes per year (ktpa) Andina mine ended the strike that started in mid-August, reaching a new wage deal last week. Over the weekend, an agreement was also reached at the 127ktpa Cesarones mine in Chile, bringing an end to a strike that began in early August. Meanwhile, an early agreement was reached at the 443kt El Teniente mine in Chile on 1 September following mine workers’ rejection of the previous proposal in mid-August.
Meanwhile, the latest production data shows that Peru’s copper output in July totaled 190.3kt, down 4.3% y/y but up 4.2% m/m. The decline was attributable to
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maintenance at the Antamina mine and lower grades at the Antapaccay. The latest CFTC data for the week ended 31 August shows a sharp reversal in speculative sentiment towards Comex copper, with net fund length rising after four consecutive weeks of liquidation. Net managed money in Comex copper futures rose by 18.7k lots, the highest since 10 August, a major recovery after having dropped to the lowest since June 2020 in the previous week.
The copper cash to three-month spread moved into contango last week after having been in backwardation for the latter half of August. LME inventories currently stand at mid-August’s levels, at 37.7kt. In contrast, the decline in SHFE copper inventories continues; inventories posted a net drawdown of 13.1kt in the week ended 3 September, and at 69.3kt are the lowest since early February.
Easing supply risk in Chile and softer China import demand have been weighing on copper prices, leading to a sharp reversal in speculative positioning in Comex copper futures.
The cash to three-month spread has lately moved into contango; LME and SHFE inventories have declined, with SHFE inventories at the lowest since 1 January while physical premiums in Europe have hit the highest since February 2015. Meanwhile, China’s unwrought copper and product imports are the weakest since June 2019.
Standard Chartered has provided a base commodities outlook as follows:
By Alex Kimani for Oilprice.com
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