From the May 01, 2012 issue of Futures Magazine • Subscribe!

Base metals see accelerating demand pace


Sideways action that has been a feature of both base and precious metals markets for much of the past year is expected to continue in future months, although some upturn could come late in the year.

China continues to be one of the largest buyers of base metals, accounting for more than 40% of demand last year, according to the London Metal Exchange (LME), but consumption of metals in China has slowed with an apparent reduction of economic activity in that country. 

“The last four months or so, what we have seen with metals prices — particularly on the LME — is pretty much sidelined,” says Peter Ghilchik, an analyst handling multi-commodity coverage for London-based metals and mining research firm CRU Group. “They are now pretty much where they were at the beginning of the year. In terms of metals markets, we’re just waiting for some positive news to come out from somewhere.”

Inventories have been falling for copper, nickel and tin, but rising for aluminum, lead and zinc. Institutional investing in base metals, after easing last year, has resumed and is approaching record highs, according to an analysis issued in early April by FCStone LLC, a London-based affiliate of INTL FCStone. 

Primary capacity for base metals production is increasing, but planned and unplanned production cuts have been limiting output for copper, aluminum, tin and lead while overall output of zinc, lead and nickel has been surging. 

Metals consumption is expected to accelerate this year from last year’s pace and continue into 2013, according to FCStone analysts. Chinese imports are expected to remain at high levels in copper, nickel and tin, contributing to tighter global supply balances, they say. 

“The picture is a bit mixed this past quarter as copper, tin and aluminum were kind of the top three base metals,” Edward Meir, a Connecticut-based independent commodity consultant for INTL FCStone says, adding that zinc, lead and nickel recently have been the laggards.

“Having said that, the whole complex is under pressure because of the slowdown in China, which is the main market,” he says (see “One-sided demand,” above). “Any slowdown there would have a material impact on prices. However, prices have not really cratered because Chinese imports of copper are still strong.” 

Meir notes, though, that the Chinese imports for the most part actually are not being consumed. “They are being brought in kind of as a trade play, as a banking play. As people bring copper in they get more collateral or more credit lines from their bank,” he explains. “So we have an odd situation where imports are very strong, but they are not being consumed. They are instead ending up in inventory and being financed by the bank. How long that game will continue is hard to say, but if it wasn’t for that, copper prices would be much lower.”

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