Material Matters: Uranium, Metal Prices And Copper

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-Chinese seeking bargains in uranium 
-Subdued prices for base metals
-Aluminium, nickel most negative
-Support for copper prices
 

By Eva Brocklehurst

China imported no uranium in June. If this indicates a slowdown in Chinese demand, it could explain why the uranium spot price took another leg down to US$36.50 per pound from nearly US$40/lb at the start of July. Macquarie suspects the simplicity of the monthly data is overstated. The lumpy nature of shipments means that in the first half of 2013 uranium imports were nearly three times larger than in the prior corresponding half. Chinese stockpiling is expected to continue, supported by a positive growth outlook for the country's nuclear generating capacity and a strategic opportunity to procure supplies at bargain prices.

If imports continue for the rest of 2013 at the current rate, and using Macquarie's forecasts for domestic output and actual demand, Chinese stocks are seen reaching 50,000-55,000 tonnes by the end of this year. This would be more than seven times current annual consumption. Macquarie queries the motivation for such large purchases. One reason could be concern over the ability of domestic output to meet future demand, as Chinese production has generally been inefficient, low-grade and slow to expand. Another is that, from this year onwards, Chinese nuclear generation capacity is projected to grow substantially. Gross capacity as at the end of last year was just 12.6 GW and Macquarie thinks it will rise to 45.3 GW by the end of 2017. Current uranium prices look unsustainably low and Chinese buyers, who are reasonably sure of the future of nuclear power in the country, appear keen to build strategic reserves.

CIMB expects commodity prices will stay subdued this quarter as weak Chinese growth and muted fundamentals continue to weigh on the markets. Some divergence is seen and the analysts continue to favour copper. Base metal price forecasts have been reduced by 5-10% over the next 18 months, except nickel which has been lowered 20% on persistent over supply. Price changes were mixed in the energy sector, with thermal coal cut by 7-11% in 2013/14, while the analysts have raised West Texas Intermediate price forecasts. Thermal coal and aluminium are rated Underweight.

Aluminium prices are seen range-bound as the market contends with overcapacity, a large inventory overhang and a high cost structure. To make matters worse, both the SEC and the LME have launched investigations that could bring to an end inventory financing trade that has created a physical tightness in the aluminium market. Iron ore's balance is expected to stay tight in the next 18 months. Chinese steel production growth forecasts are reduced and this has resulted in CIMB's iron ore price forecasts over 2013 and 2014 lowered 1% and 9% respectively. Metallurgical coal is expected to struggle in the face of weak steel markets, with supply overhang and producers aggressively increasing production to reduce costs.

CIMB maintains a Neutral weighting on gold in the short term because of concerns around an end to monetary easing, a stronger US dollar and lack of inflationary pressure. The market may be concerned about the sustainability of the current macro recovery in China, but CIMB believes that supply disruptions and better-than-expected US demand will move copper back into deficit this year.

JP Morgan notes some drivers of commodities flagged back in June are producing outcomes, with varying degrees of influence on prices. A key one is for copper. China has reported imports of unwrought copper and copper products of 410,000 tonnes in July, the highest level since May 2012. This is the third successive increase from April. The data supports the analysts' call that the de-stocking phase is over. The LME three-month copper price jumped nearly US$200/t in response the the trade data. The analysts also note that distillate-led demand has driven a sharp rise in supplied oil products and a decline in US product inventory. A stronger-than-usual seasonal rise in US reference crude has supported WTI term structures and, while this may fade in the autumn, there will likely be enough to support prices and inventory drawdown.

The strengthening fundamental data from commodity markets is also reflected in some of the broader measures of the global economy for July, according to JP Morgan. The global all-industry PMI increased by 2.9 points to 54.1. This is the highest reading since March 2012. Manufacturing PMI for the eurozone showed the first expansion in two years, led by Germany and Italy. The official PMI for China came in at 50.3, outpacing the consensus expectation of 49.8. China’s steel PMI (52.5) was the first reading above 50 since February 2013, with the difference between new orders and inventories rising to a 40-month high. US manufacturing PMI jumped to 55.4, which was the highest reading since June 2011 and the largest one month increase since 1996. US consumer confidence is also the strongest in six years.
 

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