Metals rebound as focus returns to strong underlying fundamentals

(June 23rd, 2021 - Daniel Hynes)

Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues

Central bankers talking down the prospect of tightening of monetary conditions eased tension across markets. This saw further gains in risk appetite which helped support commodity markets. Even so, some weakness in the bulk commodity sector offset those gains to push the ANZ China Commodity Index down 0.4% by the end of the session. Further concerns of government intervention weighed on iron ore prices. Crude oil was also weaker, although this was offset by gains in LNG to push the energy sector higher. Industrial metals extended yesterday’s gains, with copper and nickel leading the charge higher. Agriculture was also higher, as hogs rebounded from recent falls. Gold inched lower despite the dovish comments from the Fed, while platinum and palladium gained.

Rising risk appetite helped boost sentiment across the base metal sector, with copper and nickel rising strongly. This was despite China outlining details of plans to sell metal from its strategic reserve. The National Food and Strategic Reserves Administration said that it will sell 20kt of copper, 30kt of zinc and 50kt of aluminium on 5-6 July. This compares with current stockpiles on the LME of 160kt, 259kt and 1632kt respectively. The details of the stock releases eased concerns that the market would be awash with metal. Focus has also returned to the strong underlying fundamentals. Glencore’s CEO, Ivan Glasenberg, said that China’s efforts to cool surging metal prices can’t be sustained for long. He reiterated that it was a short term game as underlying fundamentals will keep it at current levels.

Gold eased lower despite a host of Fed officials talking down the likelihood of higher interest rates. Fed Chair, Jerome Powell, said that a debate on tapering may be on the cards, they are nowhere near to raising rates. This was reiterated by his colleagues including Williams, Mester and Daly. In the end, a stronger USD weighed on investor appetite, with the precious metals ending the session down 0.3%. Platinum found some support after earlier falling below some key technical levels.

Iron ore recovered some lost ground, as the market continues to weigh up the impact of government intervention amid strong demand. Reports over the weekend that the NDRC is committed to cracking down on iron ore monopoly, price speculation and hoarding had sent futures into a tailspin on Monday. However, data continues to point to a robust outlook for the steel making raw material. Growth in FAI remains elevated, which has seen steel production remain strong. Domestic steel margins are also positive. This comes as supply side issues persist. Global iron ore exports were down 5% y/y in May, driven by disruptions in Australia.

Crude oil prices inched lower following reports that OPEC and Russia are considering raising output when they meet next week. The unsubstantiated rumours were enough to pull Brent crude oil futures back to USD75/bbl, after a strong start to the week. The producer group once again faces some tough decisions as the market continues to show tightness. Global progress in COVID-19 vaccination campaigns have seen consumer mobility across US, China and Europe recover sharply. This should see gasoline demand in the short term. Air travel is also improving. The number of people passing through TSA checkpoints hit 2.1m in recent days, the highest level since the start of the pandemic. However, the prospect of Iranian oil hitting the market in the near term has seen OPEC remain cautious about increasing supply.

North Asian LNG prices hit an eight-year hear as hot weather in China boost demand. The JKM August future rose 3.8% to USD12.400/mmbtu, the highest level since 2013. Following a cold winter which left inventories at record lows, a hot dry summer in China has exacerbated the situation. The return of Indian buyers to the market has also created some urgency among traders keen to get their hands on any available cargo.