Torlizzi Base Metals Report: A summertime price surge

August turned out to be a positive month for base metals prices, with the London Metal Exchange (LME) Index rising in value by 7.57 percent and reaching a level not seen since September 2014.

Zinc’s monthly gain, at more than 10 percent, was its biggest in more than two years, and copper, with a 6.75 percent gain in value, had its best August since 2009. The best performer among LME metals was nickel, which posted a gain of 13 percent, while aluminum also performed well with a gain of 9.6 percent.

The steel sector was strong in August also. The Shanghai Futures Exchange (SHFE) rebar contract gained 4.41 percent in value, surpassing the Chinese yuan 4,000 ($608) per metric ton level at the end of the month.

We cite four reasons behind the unexpected strong performance posted by steel and base metals in August: 1) strength in the Chinese economy; 2) supply side reforms in China; 3) Chinese financial flows into commodities; and 4) a weaker United States dollar.

Supply side reform in China in the aluminum sector is accelerating. The Chinese government plans to achieve this by forcing smelters in four provinces to cut output by 30 percent during the winter months and by forcing the closure of what the government calls “unapproved capacity.” Future smelting projects are also affected, as all future expansion projects will need to gain central government approvals before construction can start.

According to London-based CRU, a total of 4.26 million metric tons per year in smelter closures have so far been announced. The central government will reportedly make its final decision on unlicensed capacity cuts in early October 2017. Smelters with unlicensed capacity will be allowed to buy quotes from those smelters with licenses that have closed within the past five or six years.

Looking ahead, if we are right we believe that tighter monetary policy in China will continue to weigh on investment spending in the coming quarters, and we doubt that the current pace of industrial growth output can be sustained for long.

An article in China Finance argued that China’s property market had become a major source of financial risk, and that the authorities will maintain a tight control over property markets and ask for measures related to home mortgage loan growth. More evidence of China property cooling came this week as Greenland Holdings, China’s fourth biggest developer by sales, voiced concerns about $69.2 million of overdue loans on units in the northeast province of Liaoning. As tighter property restrictions are implemented and tailwinds from credit injections ease, the way forward depends on what policy makers choose to do with credit after the Chinese Communist Party plenum, which starts Oct. 18, 2017.

Also making us cautious about the sustainability of base metal price gains is the gap that has been developing between copper versus inflation expectations and copper versus the Standard & Poor’s Construction and Engineering Index.

Nickel prices have been very volatile, and while it has been the worst performing base metal in the past year, this is starting to attract bargain hunting, as analysts fear the industry cannot survive for long at such depressed levels.

In the U.S. market for steel, Hurricane Harvey likely will be driving the upside price. According to Platt’s SBB, U.S. sheet prices, which were showing some downside potential for the tail end of 2017, could see price support from Hurricane Harvey. The extent to which prices could be affected is likely to depend on the impact the hurricane had on the pipe and tube market, as well as inventory that has been damaged by the storm. Should this be significant, the extra demand would be a positive for U.S. steel prices.

Also, according to SBB, as many as 500,000 vehicles could end up at auto shredding plants, which would be double the number of vehicles shredded after Superstorm Sandy in the Eastern U.S. in 2012. Depending on the replacement demand for those vehicles, the overall impact longer term could be supportive for steel prices despite the increased scrap supply, as demand is usually the bigger driver of prices. Near-term scrap prices are expected to firm, given the difficulty of moving scrap in the affected regions.

Commodities Pricing Trends

Aug. 31, 2017                     Jan. 1, 2017        % change

LME Copper                                        $6,815                                  $5,481                   +24.3%

SHFE Copper                                      $7,995                                  $6,813                   +17.3%

LME Secondary Aluminum                    $1,825                                  $1,560                   +16.7%

LME Nickel                                          $11,795                                 $9,970                   +18.3%

LME Ferrous Scrap                              $350                                      $297                      +17.8%

SGX Iron Ore                                       $75.11                                   $74.01                   +1.5%

SHFE Rebar                                         $585                                     $434                      +34.8%

[Prices per metric ton.]

The author is managing director of Milan, Italy-based T-Commodity and can be reached at gianclaudio@t-commodity.com. T-Commodity is a consultancy specializing in market intelligence, risk management and educational services on commodities and foreign exchange markets.