Commodities | Aug 21 2012
– Further falls in Chinese copper stocks expected
– Zinc seeing a Chinese supply-side response
– Chinese lead market's fundamentals constructive
– Platinum attractive at current levels
By Chris Shaw
While the market has heard plenty of chat with respect to a build up of Chinese copper inventories of late, Macquarie notes actual inventory levels are virtually unchanged in reported warehouses since the end of June. China's total stocks of copper are estimated to be around 900,000 tonnes.
Within this figure, about 550,000 tonnes is copper sitting in bonded warehouses, with Macquarie estimating there is a further 150,000 tonnes in SHFE warehouses. The balance of about 200,000 tonnes represents inventory in transit and material in producer warehouses.
This suggests to Macquarie around 280,000 tonnes of copper has been destocked from both smelters and consumer warehouses since the start of the June quarter. Of this, about 185,000 tonnes has moved to the export market.
Macquarie expects further falls in Chinese copper stocks through the second half of 2012 as government infrastructure spending accelerates. This should see a pick-up in demand, so reducing inventory along the supply chain.
Such changes should improve the arbitrage between SHFE and LME prices, which Macquarie suggests should attract more Chinese imports from the international market.
Barclays Capital continues to see the supply side as a key for copper prices, especially given expectations had been for some supply growth in 2012 as a number of new projects commenced production.
In terms of how the market has performed so far this year relative to expectations, Barclays notes Chilean copper production started slowly but has since picked up. Global copper production has followed a similar trend, falling at the start of the year but growing by 4% in April.
As Barclays points out, supply losses from technical issues and low grade ore are intensifying to the extent expectations regarding the degree of improvement in mine output may need to be moderated. Given already conservative assumptions, Barclays makes no changes to mine supply forecasts and the group's price forecasts stand at US$8,120 per tonne this year and US$8,450 per tonne in 2013.
With respect to zinc, Barclays notes ongoing market surpluses have continued to pressure prices and have kept market positioning short. But there is now a supply response in China, as zinc smelters have been cutting both sales and production in recent months.
This has been enough for SHFE zinc inventories to decline in 19 of the past 21 weeks, falling by a total of 81,000 tonnes since mid-March. When financing demand is included, Barclays notes there has been some support for SHFE prices over LME prices.
Physical premiums have also risen, Barclays noting spot premiums have increases to US$120-$130 per tonne compared to a 2012 average of US$80-$85 per tonne.
Asian zinc inventories have started to fall in recent weeks, Barclays noting this has eroded the global market surplus slightly. Further improvement will require a non-China supply response in the view of Barclays, which implies current market trends are not enough to support a recovery in the zinc price at present as there is still no recovery in demand.
Turning to lead, Barclays notes this is one of the industrial metals in which downstream fabrication trends have been strong. Chinese lead acid battery production rose by 45% in July in year-on-year terms and is up 25% year-to-date.
With battery production accounting for nearly 70% of China's total lead demand, such a trend is encouraging in the view of Barclays. Similarly encouraging is solid growth in e-bike (electric motorbike) production for this year.
This positive data trend justifies a constructive view on the Chinese lead market for Barclays, as total domestic visible lead stocks have halved year-to-date and there is evidence Chinese demand for lead will stay well supported through the current half year.
Weather conditions and some price competition have supported some replacement demand, while exports for Chinese batteries have risen sharply so far this year. Barclays also notes seasonal trends suggest Chinese battery production will continue to increase leading into the peak winter replacement season.
At the same time, Barclays suggests the supply side is unlikely to impact significantly on the market's current tightness without an increase in prices. Without such a price-driven supply response, Barclays expects the Chinese lead market will see further stock depletion by the end of this year.
Platinum demand is weak at present and Standard Bank sees little in the way of demand-pull factors to drive any sustainable increase in the price of the metal. At the same time, the bank cautions against being short of the metal for a number of factors.
One is where the platinum group metal basket price sits relative to the cost curve, as at current levels almost 15% of platinum production is at risk thanks to negative margins. This highlights the price pressures producers are facing at present.
As well, Standard Bank notes NYMEX platinum non-commercial shorts have risen in recent months. Short positions in both futures and options stand at 17,548 contracts, which is up from just 2,900 in February.
On Standard Bank's estimates South African platinum production this year should be as much as 576,000 ounces less than in 2011. This should be enough to drive a market deficit for the year, which the bank sees as supportive to prices.
The other positive for prices is ongoing labour issues at Lonmin, as a current strike by rock-drill operators has the potential to generate increasing production losses for the company. Lonmin has already indicated a target of 750,000 ounces of saleable platinum production this year is unlikely to be achieved.
Deutsche Bank is also somewhat positive on platinum, noting supply/demand fundamentals for the market are improving and as the price finds some support at levels around US$1,380-$1,390 per ounce. The improving fundamentals reflect supply-side issues, as Deutsche points out demand remains weak.
Deutsche also sees ongoing worker-related problems as a key to the platinum markets supply issues. Tensions continue to rise between two rival mine unions in South Africa and this is a key cause of strike action.
This year Deutsche expects a modest surplus for the platinum market this year, though strike action at Lonmin could easily see this wiped out in the broker's view. Deutsche's expected surplus makes allowance for an increase in recycled material, but here the broker cautions risk is to the downside as the collection end of the recycling chain remains highly fragmented.
For Deutsche, the current platinum price of just under US$1,400 per ounce is an attractive entry point at which to begin accumulating positions. For investors not comfortable with a simple long position, Deutsche suggests a long platinum/short palladium trade over the next three months.
Deutsche's forecasts call for annual average platinum prices of US$1,514 per ounce this year, rising to US$1,700 per ounce in 2013 and US$1,800 per ounce in 2014.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
