LONDON – Uncertainty about how metals demand will be hit by trade wars, rising US interest rates and a slowdown in China is weighing on industrial metals prices, submerging signals pointing to potential shortages.
The index of copper and five other top industrial metals traded on the London Metal Exchange has shed 11% this year while prices for the worst-performing metals, zinc and lead, have tumbled by about a fifth.
But as speculators pile on bearish positions and investors flee from the metals market during tit-for-tat trade volleys, signs of metals shortfalls are building.
Aluminium inventories are at their lowest in more than a decade and nickel's have touched five-year lows while physical premiums for zinc have hit their highest level in six years.
The price of aluminium touched its highest in more than three months on Thursday, supported by worries over potential shortages after the world's biggest producer of alumina announced a shutdown.
"The macroeconomic backdrop is pretty negative, and that has overwhelmed for the time being the tightening of supply/demand fundamentals," said Robin Bhar, head of metals research at Societe Generale in London, speaking before the LME Week industry gathering that starts on Monday.
"In the meantime, prices are back in value territory, having fallen so far. The consumers are looking to put in hedges, do some physical buying as we go into the fourth quarter."
HIGH VOLATILITY, LOW VOLUMES
Prices are off their lows, but high volatility means traders are holding only light positions, resulting in low market liquidity.
"You may get some decent news out one day and prices spike, but then the next day they can turn back down quite quickly. It's one step forward and two steps backwards," said Sucden Financial senior broker Liz Grant.
Many analysts and traders expect the macroeconomic fog to clear, allowing the tight supply backdrop to take centre stage and send prices higher.
They disagree, however, on the timing.
Michael Widmer at Bank of America Merrill Lynch expects copper to bounce to an average of $6 750 a tonne in the fourth quarter and $7 050 in the first quarter of next year, up 8% and 12% respectively from current levels.
However, Capital Economics expects copper prices to continue to hover around the $6 000 level for the rest of the year before gradually recovering to $6 500 by the end of 2019.
Some of the most stark signals of how demand is outstripping supply are coming from the erosion of global inventories.
Global stocks of copper - a favourite of many investors because of its extensive use in construction, power and transport - have slid by nearly half over the past six months.
"If the market continues to see extreme tightening effects in the Chinese copper market, then that's going to offset the negative effects from the ongoing trade war developments," said Deutsche Bank analyst Nicholas Snowdon.
Aluminium inventories in LME-certified warehouses slipped below the one-million mark last week for the first time since March 2008 and have tumbled 82% since touching a record 5.5 million tonnes in February 2014.
In China, the top consumer of industrial metals, zinc stocks in warehouses approved by the Shanghai Futures Exchange have slid to their lowest in more than a decade.
At the same time, premiums for buying physical material has soared for several metals, showing strong demand on the ground.
Premiums in China for copper have soared 75% since mid-July to $120 a tonne while zinc premiums have more than doubled to $305 in the same period.
TRADE WAR EXAGGERATED?
While metals demand is largely healthy, fears about a global trade war are misplaced, said Dan Smith, head of commodities research at Oxford Economics.
"We've moved away from this period of very, very low tariffs, but in reality we're nowhere near where we were in the bad old days," he said.
Global average tariff rates peaked at more than 20% in the trade wars of the 1930s, but the current skirmishes have edged them up to only 3.04%, with a prospect of 3.76% if threatened tariffs are implemented, according to Oxford Economics research.
The Chinese government is already taking action to counter any damage to its economy from the trade war by cutting taxes, unleashing spending on infrastructure and easing credit.
"People are always looking to bet against China and keep getting it wrong. When you see (metals) prices get so low, then the balance of risk is being a bit optimistic," Smith said.