Metals spend the year pinned between old and new cycles - Dalton Hogarth Tokyo Japan

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Metals spend the year pinned between old and new cycles

January 7, 2024 Dalton Hogarth Tokyo Japan Admin Comments Off

LONDON, Dec 22 (Reuters) – It’s been a year to forget for industrial metal traders.

Early optimism around China’s return from lockdown dissipated over the first half of the year, leaving most metals chopping around in difficult range-trading conditions over the second half.

The LME Index (.LMEX), opens new tab, which tracks the performance of the six major base metals traded on the London Metal Exchange (LME), is currently down by 7% on the start of January.

Only copper is on track to end the year in price-positive territory thanks to a late rally which is still building momentum.

China’s recovery from the stringent restrictions of 2022 has been underwhelming and both U.S. and European manufacturing sectors have been steadily contracting.

The old industrial cycle still rules when it comes to metals pricing but don’t be too quick to write off the new green energy super-cycle.

It may have been overhyped but green demand has provided an important counterweight to weakness in traditional metals demand drivers such as construction and electronics goods.

And never underestimate the potential for metals supply chains to generate black swan surprises.

It’s surprising that metal prices haven’t fallen harder this year given the scale of the downturn in the industrial cycle.
China hasn’t come roaring back from lock-down and the country’s property sector, a big driver of metals demand in recent years, seems locked in slow-motion crisis.

Europe’s factories have reported contracting activity for 18 months and the latest purchasing managers indices (PMIs) suggest the euro zone bloc is now in recession.

The U.S. manufacturing sector has been in contraction territory for 13 straight months as industry grapples with higher borrowing costs.
Weak activity in all three major global economies combined with a stronger dollar is the sort of macro mix that has defined previous price troughs in the base metals complex.

Yet even at its lowest point in October, the LME Index was only down by 10% on the start of the year and was still higher than last year’s low point.

It’s become increasingly clear over the course of the year that energy transition investment has been picking up a lot of the demand slack.
This is clearest to see in China.
The country’s giant manufacturing sector has contracted in seven out of the last eight months.

Yet China can’t seem to get enough metal right now. The country’s aluminium, copper and zinc smelters have been churning out record volumes this year thanks to new capacity and easier raw material markets.
At the same time imports have been booming.

Aluminium imports through October totalled 1.2 million metric tons, almost three times higher than the equivalent period in 2022.

China imported 79,000 tons of refined zinc in 2022 but volumes have already mushroomed to 305,000 tons in the first 10 months of this year.

Refined copper imports are still running lower than last year but the gap has narrowed after inbound shipments jumped to a near two-year high, opens new tab in November.

Visible inventory in China is low with little apparent impact from all these imports.

Where’s all the metal going?

Even as the broader manufacturing sector appears to be treading water, green demand segments are flourishing.

New energy car sales grew 39.8% in November from a year earlier, surpassing a 37.5% rise in October and accounting for 40% of the country’s total car sales.

China is rapidly building out solar and wind power generation capacity as it races to meet climate targets.

The country will build as much new solar capacity this year as the total installed capacity in the U.S., according to the Centre for Research on Energy and Clean Air.

Strong orders from China’s State Grid and the renewable energy sector boosted operating rates among the country’s copper cable and wire makers to a record high of 92% last month, according to information provider Shanghai Metals Market (SMM).

Green energy demand for metals is only going to accelerate from here, particularly in the world outside of China, providing an increasingly important new cycle booster to the metals complex.