>BASE METALS

1. COPPER

Key Copper Market Developments:
• The strength copper prices enjoyed throughout the better part of June was maintained throughout July, as after modest consolidations in the first half of the month, the spot price trended upwards over the second, peaking at $5,750/tonne at end-month, a 9% gain over June’s peak of $5,266/tonne. More recently, further gains have seen prices top $6,000/tonne, for the first time this year, during the first few trading days of August.

• Concerns over tight supply conditions that could eventually fuel a shortage of metal continued to underpin the market, prompting investors to maintain and in fact extend their exposure on the metal. Coupled with healthy demand in China, this more than compensated what we perceive to have been a continued weakness of consumption in the majority of mature economies.

• Looking at reported stocks and focusing on LME inventories, although the month saw these increase on a net basis, at 16,400 tonnes, this offset only a small part of the decline stocks suffered over the first half of the year. At end-month, LME inventories stood at 282,125 tonnes, amounting to just over one week’s Western World consumption.

2. ALUMINIUM

Key Aluminium Market Developments:
• After a subdued first half of July many market participants have been caught by surprise by the strength and speed of the rally for a metal, which at all times during this rally, has seen record, and rising, LME stocks. This trend has accelerated in the last few days of July, with cash prices ending July at an 8-month peak of $1,864/tonne on 31st July. At the start of August prices have rallied further, exceeding $2,000/tonne for the LME cash price on 5th August.

• This steep increase in the aluminium price also represented the largest percentage increase of all the six LME metals, quite a turnaround for what has often been the laggard of the complex in recent years. Indeed, the cash price is now 61% higher than the lows of late February.

• One supportive factor for the bullishness across base metals was the Chinese macro view,
particularly following the Chinese announcing that Q2 GDP was up 7.9% year-on-year.

• More importantly for aluminium, at least in the short term, is the continued inflow of primary metal into China over the past few months. Chinese import data for June showed that 267,681 tonnes of primary aluminium flowed into China, the second highest level on record.

• Meanwhile data from many of the developed markets was also more supportive than for many months, as the statistics were up month-on-month, even if still down heavily year-on-year. A prime example was North American aluminium mill products were up 5.8% in May from April. Noticeably the previously hard hit extruded products sector which experienced a substantial recovery as shipments jumped 10.1% to 221.7m lbs in May, from 201.5m lbs in April.

3. NICKEL

Key Nickel Market Developments:
• Nickel prices in July represent a vast improvement on levels seen earlier in the year. The July monthly average at $15,984/tonne is almost 7% up on June and 64% higher than the March low of just under $10,000/tonne. More recently, on July 31, the spot price climbed by $775/tonne in the space of one day to $17,625/tonne, breaching levels not seen since Q3 last year. Further sharp gains have been seen in early August, with cash prices exceeding $20,000/tonne for the first time in almost a year.

• The fundamentals have had little to do with nickel’s progress, and instead it has been the investment community that has been setting the direction for prices, encouraged by the increasing perception of a recovery in economic activity and the stainless steel sector in particular. These investors were buoyed by the latest PMI data, especially from the US, with the ISM manufacturing index for July up by 4.1 to 48.94. This was the slowest pace of contraction since August 2008.

• Stocks on the LME have recently started to show some support falling by around 3,800 tonnes to 105,864 tonnes on August 3, after having reached a one-month high of 109,716 tonnes on July 9. However this figure, by historical standards still represents a very large stockpile. LME inventories represent 7.1 weeks of “Western World” consumption, which is the second highest stock/consumption ratio among LME base metals.

4. ZINC

Key Zinc Market Developments:
• Zinc prices maintained and in fact expanded their gains over the course of July. Having started the month in the mid-1,500s, prices suffered a correction in the first half of the month that saw the spot price bottoming at $1,461/tonne. From then on, the price trended upwards to an end-month $1,748/ tonne, which marked a fresh year-to-date peak (breached again by recent advances over $1,850/ tonne). The average price for the month, at $1,579/tonne, was virtually unchanged from June.

• Investor interest has continued, in our view, to be the principal driver of the strength prices
have enjoyed recently. In line with the wider base metals sector, optimism over the prospects of consumption recovering has supported the rally. The metal’s fundamentals on the other hand remain uninspiring and, similarly to the wider complex, talk of ‘green shoots’ has yet to translate in any material recovery in galvanized steel demand and by implications zinc consumption.

• Looking at the LME inventory growth of July, the market seems to still be in surplus. Specifically, stocks rose by 54,575 tonnes over the month to reach 407,950 tonnes, equivalent to a little over three weeks’ Western World consumption. Interestingly, the bulk of the rise in LME stocks took place in the last week of July, as price broke through the $1,700/tonne barrier. There were further additions to LME stocks in early August, but again did not stop further price gains to over $1,850/tonne.

5. LEAD

Key Lead Market Developments:
• Prices have surged over recent days, to $1,949/tonne on August 3, representing the highest level since September 2008. We continue to believe that prices are way ahead of the fundamentals, with demand in the mature economies remaining weak and production recovering in China.

• Consequently, this latest surge is difficult to justify on real supply/demand grounds and is largely due to intense speculative buying on the exchanges. We also believe this speculative activity was at the forefront of the strength in prices through June and July, with the monthly average largely unchanged on the previous month, at $1,679/tonne in July from $1,674/tonne in June.

• LME stock levels have picked up over past couple of months in line with the onset of the summer slowdown, increasing by 11,650 in June and around 15,500 tonnes in July. This trend may continue over the near future, taking into account the fact that we are entering a traditionally weak period for lead demand and there have been significant restarts of previously idled capacity in China. Having said this, at 110,550 tonnes on August 3, stocks still remain relatively low in comparison to the other base metals at just over one week’s consumption.

• Lead was also boosted in the closing days of July by news that the US scrappage scheme had completely been utilised in just 7 days, and that Congress was looking to extend the package.

6. TIN

Key Tin Market Developments:
• Having fallen to $12,450/tonne on July 10 – residing to levels last noted in late April – from the year-high of $15,725/tonne on June 10, the cash quote has picked up and at present is trading above $15,500/tonne in early August. The increases seen in recent days are the result of positive economic data, coupled with improving financial markets.

• Nonetheless, out of all of the base metals on the LME, tin was the only metal to see its July monthly cash quote, which came in at $14,039/tonne, fall m-o-m, by 6.3%.

• The intensity of the speculation has been highlighted by the movement of spreads between the cash and three month price. The premium for cash material over three months on 6th August for example was $305/tonne, which compares to around $40/tonne in mid-June. The premium is even larger when compared to contracts dated further out.

• Indeed, the tin market, for some time now, has been in backwardation suggestive of the market being in a short-term deficit. However, this seems at odds with the current market situation, particularly as it is widely perceived to be over-supplied. Stocks on the LME increased by 1,275 tonnes over July to end the month on 18,405 tonnes, which largely reflects the weakness in demand more than a pickup in supply, although Chinese production is increasing. Nevertheless, at least for prices, it can be said that the pace in the acceleration of stocks has slowed down in comparison to the previous month when they surged by 2,650 tonnes.

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