Concerns over the Chinese economy continued to trouble the metals market in September with expectations that the Federal Open Market Committee (FOMC) would raise US interest rates creating further headwinds. As a result, contracts traded on the London Metal Exchange continued to see volatility, although most metals (excluding zinc) did not trade below the multi-year lows established at the end of August.
The fact that the FOMC chose not to raise interest rates and cited ‘recent global economic and financial developments’ as a reason for delaying its decision highlighted the fragile state of the global economy. In addition, a steep fall in mining equities at the end of September exposed the extent to which weaker demand and the China slowdown was impacting markets. Glencore’s share price fell a record 29.4% in one day’s trading at the end of September and led to speculation there would be further asset sales and supply cutbacks among miners and producers.
Also at the end of the month, US non-farm payrolls only increased by 142,000 — 64,000 under expectations — while August US factory orders for manufactured goods came in at -1.7% month on month, having been expected to only fall 1.3%. This led to the market speculating that the FOMC may also not be so keen to see a rise in rates in December and is more likely to push the date back into 2016.
However, as noted, most metals have not fallen below their August lows, and as a result there has been cautious optimism that prices may have reached a bottom. How long this will last remains to be seen, especially now that some investment banks are insisting that copper lower prices are on the horizon.
Supply cutbacks remain in focus
The consensus among the analyst community is that prices need to get to a level that is going to cause enough pain to see suitable capacity exit the market. To an extent, we started to see this happen in September.
Over the month, Glencore confirmed it would be reviewing its African Katanga and Mopani copper operations; that will see production at these sites suspended for 18 months and remove approximately 400,000 mt of copper from the market. In August, Freeport-McMoRan also announced it would be reducing mining activity and stated its aim to reduce production and shrink copper sales by 150 million lb/year in 2016 and 2017.
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In South America, Chile’s state mining firm Codelco said it is delaying investment in major projects as it adjusts to the lower price environment.
Additionally, Collahuasi, the country’s second-largest copper mine, announced it is scaling down copper production by around 30,000 mt/year as a result of restructuring. This represents around 6% of the mine’s annual production of 470,000 mt in 2014.
As a result of these announcements and other disruptions this year, analysts are now looking at copper moving into deficit in 2016. However, the consensus is that this is unlikely to create a long term price rally with copper only likely to trade as high as $5,000-$6,000/mt.
There have also been similar developments across other base metals and it is likely we will see more production cutbacks in the coming weeks.
Global manufacturing weaker
Overall, September PMI manufacturing data from key regions was less supportive for base metals than it had been in August. China’s official manufacturing PMI came in marginally higher at 49.8, from 49.7 in August, but the Caixin Markit manufacturing PMI edged lower to 47.2 down from 47.3 in August. Markit said Chinese manufacturers saw the quickest deterioration in operating conditions since 2009 and added that the PMI now stands at a six-and-a-half year low.
It is also noteworthy that manufacturing companies surveyed for the Caixin Markit index cut output at the sharpest rate in six and a half years, while staff numbers fell at the quickest pace since the start of 2009. However, pressure driving the sector’s decline has started to ease.
The eurozone PMI was also down slightly at 52 in September from 52.3 in August, representing a five-month low. Meanwhile, the US manufacturing ISM in September was down at 50.2 from 51.1 in August. This remained the lowest reading since May 2013, and out of the 18 manufacturing industries, only seven reported growth in September.
As a result of the mostly lower PMI readings our weighted global manufacturing PMI of these key regions ticked slightly lower to 50.3 in September from 50.4 in August.
LME position data
LME position data released for September 25 was predominantly bearish for base metals. Copper saw net length decrease 24% to 12,506 lots from 16,513 lots September 18. According to the position data, the short position increased by 1,194 lots and the long position dropped 2,813 lots
Elsewhere, metals remained under pressure with position data mostly bearish. Net length for aluminum fell 3,757 lots to 80,633 lots on September 25 compared to 84,390 lots September 18. Similarly, nickel saw net length down 1,427 lots to 14,779 lots September 25 compared to 16,206 lots September 18.
Next obstacle: supply
It seems base metals may have reached a bottom — albeit temporarily — with any further supply cutbacks likely to support prices in the near term. It remains to be seen how long prices will be supported, especially if there are any further economic headwinds, and the metals complex still lacks underlying support to encourage follow through buying.
An improvement from any of the macro industrial indicators would undoubtedly provide a lift for base metals as we approach the year end, but as LME week comes to a close, perhaps more direction will be found as the market meets to sound out next year’s global metal requirements.