aluminum ingots malaysia
Aluminum is one of several commodities with inventories rising on a global basis.
Photo by Brian Taylor.

Commodities buildup likely to keep growing

Industry watchers seeing oil and metals inventories rising as COVID-19 hits rest of developed world.

March 17, 2020

A sub-context of the COVID-19 coronavirus story, as it hit the People’s Republic of China in late January and February of this year, was the impact on global commodities markets. China produces and consumes up to half of some metals and minerals, so as its economy retreated when cities and provinces locked down, drastic changes hit global commodity supply and demand.

As of mid-March, China’s economy is beginning to ramp back up, but now metals and oil consumption in neighboring Asian nations, in Europe and in North America are beginning to shift as government leaders there enact “lockdown” measures.

Commodity analysts are identifying several trends, but the overriding one involves inventory buildup. In the oil market, where per-barrel prices have been plummeting throughout March, London-based IHS Markit wrote March 16, “The current situation points to the possible buildup of the most extreme global oil supply surplus ever recorded.”

While some oil production cutbacks are taking place and others looming, IHS Markit predicts that “if the price war continues amidst a global recession and coronavirus crisis, the surplus could range from 800 million to 1.3 billion barrels in the first six months of 2020.” The firm adds, “Up until now, the largest six-month global surplus since 2000 was from late 2015 to early 2016, when it was a cumulative 360 million barrels.”

More pertinent to metals traders, copper inventories accumulated at a rapid pace in February. Germany-based copper producer Aurubis, citing S&P Global Platts, wrote in early March that finished copper inventories in global warehouses “made a significant leap in February,” reaching 550,000 metric tons at the end of the month. That figure is about 184,000 metric tons higher—a 50 percent boost—compared with 29 days earlier.

Aluminum inventories appear headed in the same direction, as China’s producers continued to churn out ingots and rolls even as its aluminum consumers retreated from manufacturing and construction activity.

Reuters in mid-March, citing Chinese government statistics, reports that nation’s aluminum production rose by 2.4 percent year on year in the first two months of 2020 “as smelting capacity commissioned late last year took supply higher despite a big hit to demand from the coronavirus outbreak.”

As with copper, the net effect is a buildup of some 500,000 metric tons of aluminum in Shanghai Futures Exchange warehouses, which Reuters says is “more than double” last year’s level.  An industry analyst reached by Reuters estimated another 300,000 metric tons is “sitting at smelters [in China], undelivered to markets.”

That surplus metal hits the global market just as COVID-19 is slowing down economic activity in Japan, South Korea, Europe and North America.

The same math seems to apply in the steel sector, where government statistics in China indicate that nation continued to churn out steel in the first two months of 2020—at a rate 3.1 percent higher than in early 2019.

Metals producers and traders will be closely watching how COVID-19 measures in Europe and North America affect metals demand in those places. If a combination of less household consumer and business activity puts an expected dent in metal demand, prices seem destined to stay low. Following that, output is likely to shrink in the short-term—along with the demand for scrap.

Potentially helping to keep scrap supply and demand more closely balanced will be the elasticity of supply. As scale prices go down, and if construction or manufacturing activity slows, scrap scarcity is likely to play a role in price settlements.