The World Bureau of Metal Statistics’ (WBMS) most recent press release makes for curious reading.
Covering as it does the first three quarters of this year, the January to September period, you could read the report and then ponder the recent price direction of metals and ask what on earth is going on.
The WBMS report analyzes all the principal base metals (aluminum, copper, lead, zinc, nickel and tin). You may be forgiven for expecting healthy surpluses in all metals if the steady demise of prices over the last quarter were a true reflection of the fundamentals — but that is not the case.
“The calculated market balance for primary aluminium for January to September was a deficit of 206 kt which follows a deficit of 1175 kt recorded for the whole of 2017,” the report states.
The copper market recorded a deficit of 6.3 kt in January to September 2018, which follows a surplus of 93.8 kt in the whole of 2017, representing a negative swing of just over 100 kt.
The lead market recorded a deficit of 138 kt in January to September 2018, which is admittedly better than last year (when lead was in deficit to the tune of 393 kt for the whole of 2017).
The zinc market was in deficit by 52.3 kt during January to September 2018, which is better than last year’s deficit of 431 kt recorded over the whole year.
The nickel market was in deficit during January to September 2018, with apparent demand exceeding production by 33 kt (the deficit over the whole of 2017 was 41.3 kt).
The tin market also recorded a deficit of 9.7 kt during January to September 2018, but was the only metal to report a slight increase in stocks year on year — a paltry 2.4 kt.
All other metals reported lower inventory at the end of September compared to the end last year, as you would expect for commodities in deficit.
So why are prices drifting off?
Lack of investor appetite is the answer. Net longs have been cut for most speculative positions among the base metals, as investors take fright at a gradually slowing Chinese economy. In addition, repeated reports of trade wars and trade barriers have dampened expectations of a buoyant economic outlook for 2019.
But while investors’ short-term positions are the stuff of expectation, longer-term prices are moved by supply and demand.
The fact is, many, if not all, of these metals remain in deficit, with little sign of a sudden change in the supply landscape. Demand is what is spooking investors, but so far it has held up well and we all know China will spend on infrastructure if the economy slows too much (so demand is unlikely to collapse).
Prices from a fundamental perspective are therefore entering not bear territory, but bargain territory. Feeling brave?