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Friday July 22th 2016

Base Metals

Friday July 22th  2016

Overview

The main event of the week was the ECB press conference where Mr. Chairman Mario Draghi left the three key interest rates unchanged and gave a rather neutral speech. The rhetoric was pretty much the same:

  • ECB stands ready to act if needed.
  • Satisfied by the small pick-up in inflation.
  • If more stimulus is needed to face Brexit or a possible crisis of the EU banking system, ECB will be ready to act with all the tools available. So far though there is no need for that.

EUR/USD first went bid at around 1.1055 to then come all the way back in what was a non-event conference. At the moment, despite the positive French and German PMI manufacturing index for July (48.6 vs exp. 48.0 and 53.7 vs exp. 53.5), we are back below the 1.10 handle also because of the release of a good US Manufacturing PMI at 52.9 vs exp. 51.9.

Oil traders are still betting on a slide back to 40$ a barrel as output rebounds in Canada, Iran, Nigeria and the U.S. “The oil market has still to absorb higher supply from the return of disrupted production,” Giovanni Staunovo, an analyst at UBS Group AG in Zurich, said Thursday. “Oil prices could fall to $40 again.” “The road ahead is far from smooth,” the International Energy Agency cautioned July 13 as it said bloated stockpiles will continue to damp oil prices.

Although U.S. crude stocks fell for the ninth week in a row, inventories remain historically high at 519.5 million barrels. There was also a surprise jump in gasoline stocks despite the peak U.S. driving season.Baker Hughes U.S. rig count data are due out later Friday. The number of rigs operating in the U.S. has been increasing as producers adapt costs to a lower price environment.

Finally, a stronger dollar weakens demand for oil. At the moment we are trading at 43.97 for WTI and 45.38 for Brent.

Metals

Despite the thin volumes on the London Metal Exchange, the metal complex is still moving north with Nickel and Zinc being the top performers. This week we had also some interesting data on demand/supply from WBMS (World Bureau of Metal Statistics) which seem to back the upward movement in prices as all base metals were found in deficit during the January-May period.

The aluminium market deficit expanded to 408,000 tonnes in January-May from a deficit of 298,000 tonnes in January-April and a deficit of 331,000 tonnes recorded for the whole of last year. Aluminium demand in the first five months of this year at 23.82 million tonnes was up 106,000 tonnes or 0.5 percent on the first five months of 2015. Production fell 1 percent or 232,000 tonnes. Chinese aluminium output was estimated at 12.616 million tonnes in January-May, accounting for almost 54% of world production. Chinese apparent demand was 0.2 percent lower year-on-year during the same period. In terms of price movement we saw it as highs as 1703$ (3M; the 2016 highs so far) for then sharply retracing around 1615$ where it seems to have found some value so far. Maybe is still a bit too early to step in but anything around/below 1550$ would be a good chance to play it on the long side.

The most surprising one probably was the copper market which moved into a deficit pf 48,000 from a surplus of 26,000 tonnes in January-April. The market registered a surplus of 373,000 tonnes in the entire 2015. World copper mine production was 8.14 million tonnes in the first five months of the year, up 4.8 percent from the same period last year. Global refined copper production in January-May rose 4 percent to 9.66 million tonnes, with a significant increase recorded in China - up 260,000 tonnes - and Chile - up 36,000 tonnes. Global copper consumption was 9.706 million tonnes in the same five months, up from 9.136 million tonnes in the same comparison. Chinese apparent consumption during the period rose by 487,000 tonnes to 4.841 million tonnes, accounting for half of global demand. In May alone, global refined copper production and consumption were at 1.874 million tonnes and 1.929 million tonnes respectively. Yet we are still struggling to break above the 5000$ handle even though it looks like well placed to go further. If it will, and is not that obvious, good selling pressure will surely come back around the 5200/5300$ mark.

The deficit in the lead market narrowed to 27,000 tonnes in the first five months of the year from 29,000 tonnes in January-April. The market saw a deficit of 4,000 tonnes for the whole of 2015. World refined lead production from both primary and secondary sources from January till May was 4.223 million tonnes which was 1.2 per cent higher year-on-year. Global lead demand rose 85,000 tonnes year-on-year during the same period this year. Apparent lead consumption in China totalled 1.59 million tonnes in January-May, which was 12,000 tonnes below the comparable period in 2015 and represented over 37 percent of the global total.

The nickel market deficit expanded to 42,600 tonnes in January-May, from 8,800 tonnes in the first four months of the year. In the whole of 2015, WBMS pegged the surplus at 45,000 tonnes. Refined nickel production and demand in January through May totalled 728,000 tonnes and 770,000 tonnes respectively. Mine production during the same period was 801,100 tonnes, 82,100 tonnes below the comparable 2015 total. Further we still do have in place the Philippines issue even though the real effects still need to be measured properly. According to the Philippines Chamber of Mines’ legal expert Ronald Recidoro, the concerns that mining has been heavily affected by the recent audit is overblown. Out of the 43 operating large-scale metallic mines in the Philippines, 21 have already secured ISO 14001 (environmental administrative order issued last) certifications for their environmental management systems and therefore are unlikely to be cited. "The rest are all still in the process of getting certified. However, these companies still in-process are the smaller mines and will not substantially impact the country's exports of metallic ores," Recidoro said. Difficult to properly judge at the moment. Market price is rather nervous as yesterday we saw a new 2016 high at 10’900$ but today we are already back to 10’500$. Surely the high volatility is in part due to the low volumes but also to a decent degree of uncertainty. I think Nickel still needs to be played on the long side and a perfect entry point would be around the 9500/9600$ level.

The tin market was undersupplied by 2,000 tonnes in January-May, compared to 3,800 tonnes in January-April. Global reported refined tin production, excluding re-processed LME metal, rose 13,300 tonnes year-on-year in the first five months of the year. Refined tin production in Asia increased to 128,400 tonnes during the period from 114,500 tonnes the months last year. Global tin demand in January-May was 154,500 tonnes, an increase of 4.6 percent from a year ago, with apparent demand in China rising 13%. Further, Chinese imports of tin ore and concentrates from Myanmar rose 58.1 percent year-on-year to 38,936 tonnes in June, according to the latest customs data. This took year-to-date imports to 254,120 tonnes, up 88% from the same period of last year. Myanmar is China's largest supplier of tin ore, accounting for almost all imports into the country. Nevertheless, China imported 393 tonnes of refined tin and tin alloy in June, which is down 70.3% from the same month of last year. It imported 4,220 tonnes in the first half of this year, which is down 4.6% from the same 2016 period. It looks still very strong and with a stable price action so far. A perfect entry to try a long would be around 16800$ level or a bit riskier one at 17400$.

The zinc market was in deficit of 52,000 tonnes in January-May, compared to a surplus of 6,700 tonnes in January-April. The market was in a surplus of 194,000 tonnes in 2015. In the first five months of 2016, global refined zinc production and consumption fell by 5 percent and 0.8 percent year-on-year respectively. World zinc demand was 44,000 tonnes lower year-on-year in January-May, with Chinese apparent demand at 2.674 million tonnes - more than 48 percent of the global total. Chinese refined metal demand rose 6.8 percent but its output slipped 0.3 percent year-on-year during the same period. Very difficult to trade as it just goes up the next key level on the upside are 2320$ and the strong resistance at 2400$.

 

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