(Repeats column that ran on Monday, with no changes)
By Andy Home
LONDON, Oct 18 (Reuters) - This year's London Metal Exchange
(LME) Week was a subdued affair by comparison with past excess.
Put on ice last year due to COVID-19, the annual metals
party returned in slimmed-down form with many opting for virtual
over physical drinks.
Analysts were in equally sober mood.
Everyone's still positive on the longer-term energy
transition story but more immediately worried about China.
The debt problem faced by real estate developer China
Evergrande Group is no Lehman Moment, to quote Bank of
China's head of commodity strategy Amelia Fu, speaking at the
LME Seminar. But weakening Chinese property sales spell trouble
for what is a big metallic demand driver.
Average copper, nickel and zinc prices will decline next
year as slowing demand growth coincides with increased supply,
according to research house CRU, summing up the broad consensus
among analysts last week.
Unfortunately, no one told the markets, which rudely
gate-crashed last week's proceedings.
By Friday's close zinc had shot up to a 14-year high of
$3,944 per tonne and copper was in the grip of the most
ferocious squeeze seen in the London market since 1990.
POWER WOES GALVANISE ZINC
Jonathan Leng, principle zinc analyst at WoodMackenzie, had
the unenviable task of explaining why the research house is
expecting prices to weaken to $2,900 per tonne next year just as
Nyrstar announced Wednesday it was cutting output by up to 50%
at its three European smelters due to the soaring price of
electricity.
The zinc market was caught equally off-guard by the
potential metal loss at what amounts to 700,000 tonnes per year
of collective annual capacity.
China's power woes were in the price. Europe's weren't and
the sense of panic was reinforced when Glencore said it
too "is monitoring the situation across its European zinc
smelters and adjusting production to reduce exposure to peak
price periods during the day."
LME three-month zinc opened last week at $3,160 and
closed it out at $3,795 after visiting that 14-year high on
Friday. Time-spreads were similarly rocked, the
cash-to-three-month period <CMZN0-3> flipping from small
contango to a backwardation of $52 per tonne at the Friday
close.
COPPER CARNAGE
That level of tightness, however, pales into insignificance
next to the London copper market.
The LME copper cash-to-threes period <CMCU0-3> exploded to a
$350-per tonne backwardation on Friday with the cash premium
rising further to $380 on Monday morning. That's the widest
spread since 1990, when the cash premium reached $483.
The cost of rolling a position overnight reached $175 per
tonne at one stage on Friday and was still painfully high at up
to $100 on Monday morning.
This squeeze came with advanced warning in the form of the
daily 10,000-tonne cancellations of LME stock that have been
running since the start of the month.
The pace was upped in the Friday LME stocks report, which
showed another 33,000 tonnes had been moved into the physical
departure lounge. That left just 14,150 tonnes of available
copper in the LME's warehouse system, the lowest level since
March 1974 and enough metal to cover global consumption for just
five hours.
Is all this cancelled copper going to China, where stocks
are also low? Or is it part of a premeditated attack on unwary
bears?
The truth is it doesn't matter much for anyone still short
of cash-date copper or the cluster of call options sitting above
$3,000 per tonne, which were all brought into play on last
week's price action.
"Copper remains a physical good, whose futures price is
ultimately tied to the ability to deliver physical units into
the exchange," according to Goldman Sachs, which highlighted the
depletion of LME stocks in its counter-consensus bullish call
for the copper price to hit $10,500 by year end.
LME three-month metal has almost got there with a
Monday high of $10,452.50. Cash metal has already punched
higher.
Monday's LME stocks report showed 5,150 tonnes of arrivals
and short-position holders can only hope more is on the way. A
lot more.
STRUCTURAL SHIFTS IN ALUMINIUM AND NICKEL
Aluminium was the analysts bull pick last week and the LME
three-month price has duly obliged by racing up to a
13-year high of $3,229 per tonne on Monday.
Here too, though, events are unfolding faster than the
consensus as China's power crisis spreads to Europe with several
regional smelters thought to be lowering production in the face
of spiralling spot power costs.
A new concern is a growing shortage of both silicon and
magnesium due to supply-chain disruption. The two metals are
widely used across a spectrum of aluminium products, suggesting
a downstream hit may shortly be following the upstream smelter
hit.
The underlying narrative, however, remains one of a
structural shift in the aluminium market as China tries to pivot
away from coal in its power mix, leaving a big question mark
hanging over its coal-hungry aluminium smelting sector.
Nickel is also facing a "structural uplift in pricing"
thanks to rising usage in electric vehicle batteries, according
to Jessica Fung, head strategist at Pala Investments.
One-third of nickel will be used as an energy source by
2030, creating an entirely new market and price driver for the
metal, Fung told the LME Seminar.
Whether there will be too little or too much supply by that
stage remains a hot topic among analysts and in a week of broken
records, LME nickel didn't do much at all.
TIN THE WILD CHILD
There is no doubt that tin remains in short supply.
Few bank analysts even cover the tiny tin market but it has
been the wildest of all this year and remains so, LME
three-month metal extending its bull charge to another
all-time high of $38,249 per tonne on Monday.
The cash-to-three-month tin spread closed on Friday at a
$1,250 per tonne backwardation, which would have been
extraordinary in any year but this after it hit $6,500 in
February.
Tin is trading at scarcity levels and is likely to continue
to do so for another three to six months, according to Tom
Mulqueen, head of research at LME broker AMT.
Super low inventory - LME warranted stocks are just 255
tonnes - has limited the market's ability to absorb supply
shocks, Mulqueen told the LME Seminar.
Which is a problem when there are so many potential supply
shocks, ranging from renewed outbreaks of the coronavirus to
power shortages in both China and Europe and a dysfunctional
global shipping sector.
LME Week can often be a wild occasion for the great and the
good of global metals trading. This year it was the markets that
turned wild. And as tin has shown, they can remain wild for a
long time before any sort of normality returns.
(Writing by Andy Home; Editing by Susan Fenton)
Glencore (GLEN)
