Base metals: China’s appetite for base metals remains healthy

Last week, base metal prices suffered from the general selloff in the commodities markets, but recovered somewhat during this week.

The broad selloff was triggered by concerns about demand prospects after the decline in US industrial production in February and the disappointment over the US Federal Reserve’s decision to cut interest rates by just 75 basis points while the market expected a cut of 100 basis points.

Nickel and zinc were mainly hit by the selloff. While nickel prices rebounded strongly, zinc lagged behind this performance. Nickel and zinc are now trading at around USD 31,500 and USD 2,400, respectively.

Aluminum and copper currently stand at around USD 3,000 and USD 8,500, respectively. While weak demand from western countries remains the main drag on the base metals sector, China’s appetite for base metals looks very constructive. The rebound in base metal prices was supported by the release of the latest Chinese trade data. Net base metals imports resumed their upward trend and confirmed once more China’s strong demand for metals.

In those markets where China has traditionally been a net importer, like copper and nickel, numbers were quite strong with nickel imports surpassing last month’s record high to touch another all-time high. Copper imports continued their upward trend as well. On the other hand, in those markets where China has historically been a net world supplier, declining export numbers have been recorded. This is mainly the case for primary aluminum, which has seen exports declining over the last mont.

This is not very surprising given that the Chinese government is trying to curb output of the metal, which requires enormous amounts of energy to produce. Nevertheless, since China is both the largest producer and consumer of the metal, it will have a major impact on prices when the country becomes a net importer of aluminum, which we expect to happen sometime during this year. Overall, the latest Chinese trade data confirm our improved outlook for the base metals sector.

Aluminum, copper and nickel, which pushed Chinese net base metal imports higher, are also the metals that we think will have the most upside potential since they are currently suffering from supply-side problems. Aluminum is mainly suffering from reduced power supply around the globe due to coal supply disruptions, underinvestment in infrastructure, water shortages and severe weather conditions. Moreover, increasing energy costs are becoming prohibitive for some smelters, which should further constrain production of the metal.

In the nickel market, the destocking cycle of the steel industry, the largest consumer of the metal, has come to an end. Coupled with the current supply problems and rising production costs in China, this should also be supportive for prices. While prospects for copper prices have clearly improved, the main risk for the metal is a slowdown in global economic growth. Consequently, we are taking a more positive stance on copper prices for the longer term, but remain cautious until we see clear signs of an economic recovery.

source: CS