Base Metal Prices at Odds with the Evolving Supply Landscape

Given the state of the world, one would expect base metal prices to show every sign of a resurgence. Certainly, analysts have been bullish about a supply squeeze for months because sky-high natural gas prices forced record electricity costs across Europe. Just this week, the FT reported that Aluminum and Zinc smelters continue to close all over the continent with the latest casualty being the 175,000-ton Slovalco aluminum smelter in Slovakia.

Source: Adobe Stock/Bonzodog.

According to Norsk Hydro company representatives, who are the majority owners, Slovalco will shut down primary production by the end of September. Meanwhile, Norsk Hydro also faces a strike at its Sunndal aluminum smelter in Norway, Europe’s largest such facility. In this case, the organization reports that the strike will idle about 20% of capacity for four weeks starting Monday. All of this comes on the back of zinc smelter closures in the Netherlands and Spain. To top it all off, LME inventory levels are currently at near record lows.

Why are investors so sanguine about prices? After all, there seems no end in sight to high power costs. If anything, they are set to get worse as Europe faces higher winter fuel demand. In fact, governments are already drawing up plans for rationing and enforced closures for high energy users so that they can keep their populations’ homes warm and lights.

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The Answer to Base Metal Prices is Most Likely China

Well, here’s one possible answer. Perhaps, after all the volatility these last twelve months, the markets are now laser-focused on the traditional driver of global metals demand and prices: China.

Indeed, China’s stuttering construction sector proved a huge dampener on the world’s economic expectations. On top of that, COVID restrictions continue to limit activity in the services sector, which, in turn, causes myriad problems for manufacturing. There’s also the heat wave in eastern China, which sent power demand soaring and resulted in limited rationing. Among the most affected? The area’s aluminum, zinc, and copper smelters.

Copper Fighting Back

The only sector showing any real resilience copper imports. 12 months of well-below-par imports pushing stocks to low levels helped bring this on. This also came in response to Beijing’s plans to considerably expand power transmission. So far, the government has announced plans for six major new lines and even more medium-capacity transmission lines over the next year. Normally, aluminum would be the biggest beneficiary of major power transmission projects like this. However, so far, the index has barely moved in response to the announcements.

For now, at least, recessionary fears and a slowing Chinese economy are the narratives of the day. However, even in a recession, industries will continue to consume metal. This simple fact, combined with woefully low global inventory levels and shuttering production capacity, feels like watching a train crash in slow motion. Let’s hope both markets and consumers have time to react as we get closer and closer to impact.

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