Metals Update – 20 Jan 23

Dr. Copper takes a breather.

Prices slip back from new highs on China worries.

Copper prices fell towards the end of the week as investors worried about weak demand as China, the world’s largest metals consumer, prepares for a holiday and other economies slow due to high-interest rates. The metal, most widely seen as an indicator for global economic health, slipped as traders took profits following its recent rally.

The three-month copper contract on the London Metal Exchange fell 1.5%, after reaching its highest level in more than seven months on Wednesday at $9,540. The removal of COVID-19 restrictions in China had previously fuelled optimism about an increase in metals demand, causing copper prices to rise 16% within two weeks.

Copper markets are expected to experience a decline in demand next week as Chinese markets will be closed to celebrate the Lunar New Year, which is traditionally a weak period for metals consumption. Additionally, the holiday period is characterized by an increased number of people traveling for reunions with family, which could potentially lead to fresh outbreaks of COVID-19. The recent weak U.S. retail sales data further fuelled concerns of a recession caused by rising interest rates aimed at addressing inflation.

As natural gas and utility prices continued their slide into 2023, many analysts point to the commercial viability of reopening smelters as a reason to believe in an increase of supply in Copper and other energy market-affected industrial metals like Zinc.

LME Zinc stocks hit 30 year lows

Chinese re-opening dampens price spike prospects

London Metal Exchange (LME) zinc stocks have reached their lowest levels in over 30 years, but an increase in stocks and weak demand from China are reducing concerns about potential shortages. The shutdown of some European zinc smelters due to high power prices has been a major contributor to the low LME zinc supplies. Despite this fact, LME zinc prices have risen in recent weeks due to speculation about China’s reopening from COVID-19 restrictions and reached the highest in over 4 months on Monday. Additionally, LME zinc stocks have dropped 89% in the past year to 20,000 tonnes, the lowest level since July 1989.

When LME stocks are low, it is common for LME spreads to increase into sharp backwardations, where spot prices are higher than futures prices, as traders scramble to secure supplies.

However, this trend is not currently happening as the backwardation of the zinc benchmark spread, the difference between cash LME contract and three-month futures, has decreased to $19 a tonne from $127 in August. This is because inventories in China have been increasing in recent weeks, including on the Shanghai Futures Exchange, where stocks have nearly doubled to 35,098 tonnes in the past three weeks.

Foenix Partners, 26 Curtain Road, London, EC2A 3NY