An interesting analysis in a Reuters article the other day raises questions about the viability of, and justification for, recent increases in non ferrous base metals such as copper, zinc and even aluminum. The basis of the argument is that all non exchange traded metals are continuing to decline in price or at best are flat. Examples given are ferro alloys and iron ore. Yet metals that are exchange traded on the LME, Comex and SHFE, even metals like aluminum with massive world stocks, have all risen dramatically since the beginning of the year. Since late December when copper touched a low, it has shot up 72% and zinc has gained 28% while spot iron ore prices have fallen 24% and ferrochrome 63%. The clearest example is among the precious metals. Platinum and rhodium are used predominantly in the same application – catalysts for the auto industry. Exchange traded platinum is up 36% this year while rhodium is up 0.9%. The performance of rhodium illustrates how poor auto catalyst demand really is. But in spite of this, platinum has jumped dramatically in recent months. The article illustrates how the rise in exchange traded metals are not supported by widespread industrial demand. One could argue that consumption of copper and aluminum are not for the same applications as steel but the reality is demand for all metals moves broadly in tandem driven by the underlying performance of the economy, or nowadays economies as they are all linked in a global inter-reliance.
But you may argue has not copper demand been driven by physical buying in the market, by the movement of tens of thousands of tons of primary copper mostly from Chile, Australia etc and LME warehouses to China? Yes but as we have written elsewhere a very large part of that is movement of stock from one location to another ” from producers or the LME to the SRB in China, not for consumption. What about trade buying you may ask? Indeed there has been a lot of restocking in China following a huge run down in stock levels but there has also been a more important switch from scrap consumption to primary metal boosting primary in the absence of a traditional demand for scrap. Recent quotes in another article are an interesting indication that this could be a temporary process. The article quotes Singapore traders as saying “China has been buying so much material but there still isn’t any real demand and people were buying only because it was cheap. That isn’t the case any more.” Commenting on the SHFE premium over the LME they said, “You can still make lots of money on the arbitrage in copper. But in aluminum I hear most of the stockpiling has been done. The same may also soon be coming true for copper.”
He added that trading houses had started to cut offers for some material and that scrap supplies may start flowing into China once more, “Scrap dealers have been very unwilling to lower prices below $3,500, which prompted buyers to switch to cathode. But with cathode prices above $4,500, scrap sales will probably take off again.”
So if this surge in China base metals demand could be coming to an end, can we expect exchange traded metals to come back into alignment with non exchange traded? It may not be that simple, there is a still a speculative element involved, but it does raise questions in the event of a drop off in physical buying how long copper, zinc and certain other metals can continue to defy gravity.