TL;DR

Last month I asked whether: (a) base metals were returning to trend (four months of price acceleration followed by one month of deceleration), or (b) China’s slowdown and low rate of personal consumption meant its new base metals opiate would sit on Chinese shelves for a little longer - regardless of falling copper inventories.

Well, the answer was (b) and here’s what went on in March 2023.

Base metals

The price decelerations in March and February wiped out all of the price acceleration in the previous four months. And the six prior months amounted to a massive net deceleration.

Overall, it’s been a profoundly ugly year for base metals prices.

As we’ve discussed before, China eats 60% of all of the nickel and 42% of global copper supply.

So, what goes on in China drives what happens to price, subject to inventories and supply responses from Indonesia, Africa, Brazil, Chile and in our backyard.

There is mounting evidence to suggest that we were correct about China’s reopening not being that wonderful for demand.

Reasons include cratering real estate development investment (another 4.6% fall in February), slowing energy production, material decreases in crude oil and natural gas imports, and a 26% reduction in passenger car sales in the first six weeks of the new year.

The Dragon is still coughing, and that explains the price destruction in base metals over the past 12 months.

Bulks

The rate of change in the bulk metals index slowed again in March.

Same reasons as above, meaning that China eats >70% of iron ore supply and steel making/electricity production in China was down.

That said, the rate of price change has been less volatile over the past six months and looks more like it did during the original COVID lockdowns in 2020!

The headwinds won in March

A strong USD, higher interest rates, anaemic Chinese consumption and slow production, and last month’s bank failures (SVB, Signature and Credit Suisse), probably explain why industrial metal price headwinds were stronger than tailwinds in March.

LME spot prices across the base metals complex (aluminium, copper, nickel and zinc) in March confirm the trend.

Now what?

Banking industry uncertainty dents credit impetus. Banks become less inclined to lend. Less lending means less investment in land and capital to keep up with increasing energy demand for heating and for manufacturing infrastructure, plant and storage for the green transition, as well as data.

Coupled with decades of underinvestment in fossil fuels, we should be seeing massive pressure on prices, no?

No.

This is the macro effect of demand destructive lockdowns, inflation, interest rate increases, a stronger USD and a stagnating Chinese economy. Industrial metal prices might get weaker.

If we assume that supply remains constrained, we need to watch these key drivers of commodity demand to pick the tipping point in prices, namely: China, oil, interest rates, USD and policy response.

See you in the market.

Mike