In July, base metals faced two dominant headwinds in the form of the Greek debt crisis and the China stock market crash that saw metals test fresh multi-year lows on the London Metal Exchange. This led to a number of investment banks adjusting their short-term and long-term price forecasts as they focused on the likely impact of the rebalancing of the Chinese economy and its projected slower growth — what China’s Premier Li Keqiang has coined the ‘new normal.’ Three-months copper hit a six-year low at ,164/mt on LMEselect at the end of the month with market participants speculating that the metal would soon break the ,000/mt level in the near term. Three-months nickel also traded at a six-year low at ,430/mt on the exchange’s electronic trading platform, with LME warehouse nickel stocks also rising at the end of July. The only metal to buck the downward trend was tin, which rallied higher on the back of confusion over a new Indonesian exchange trading regulation, leaving Indonesian exporters without the necessary documentation to clear their exports. Three-months tin hit a three-month high of ,345/mt on LMEselect at the end of July. Greek drama enters final act July started with metals drifting lower in volatile conditions ahead of the Greek vote on whether the country would agree to its creditors’ terms.
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In July, base metals faced two dominant headwinds in the form of the Greek debt crisis and the China stock market crash that saw metals test fresh multi-year lows on the London Metal Exchange. This led to a number of investment banks adjusting their short-term and long-term price forecasts as they focused on the likely impact of the rebalancing of the Chinese economy and its projected slower growth — what China’s Premier Li Keqiang has coined the ‘new normal.’
Three-months copper hit a six-year low at $5,164/mt on LMEselect at the end of the month with market participants speculating that the metal would soon break the $5,000/mt level in the near term. Three-months nickel also traded at a six-year low at $10,430/mt on the exchange’s electronic trading platform, with LME warehouse nickel stocks also rising at the end of July.
The only metal to buck the downward trend was tin, which rallied higher on the back of confusion over a new Indonesian exchange trading regulation, leaving Indonesian exporters without the necessary documentation to clear their exports. Three-months tin hit a three-month high of $16,345/mt on LMEselect at the end of July.
Greek drama enters final act
July started with metals drifting lower in volatile conditions ahead of the Greek vote on whether the country would agree to its creditors’ terms. The victory of the ‘no’ vote campaign with a 61% majority saw Greek Prime Minister Alexis Tsipras return to the negotiating table to try to secure a compromise on a new financial aid package, sparking risk aversion across the base metals complex.
Copper initially broke below $5,500/mt with the LME Commitments of Traders Report (COTR) showing money manager positions net short by 346 lots July 10 — the first time copper had been net short since the exchange started publishing COTR data in August 2014. While the Greek situation was ‘resolved’ by mid-July with the country receiving an additional Eur86 billion ($94 million) of aid over three years, the initial fear of a Greek exit from the eurozone unsettled investors and dented market sentiment.
Whether or not this is the final curtain on the Greek drama remains to be seen, but for now the crisis definitely appears to have taken a back seat to the destabilizing influence of the Chinese equity market crash.
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Chinese equities’ destabilizing influences
China’s equity markets saw their worst month in July since 2013 with a significant sell-off. The Chinese government and central bank announced a variety of measures aimed at countering the falling equity markets over the month, but stock market volatility remained, and had a significant impact on metals with some Chinese funds selling metal to cover equity losses. The fall in equity markets also had wider implications for China with investors speculating on the likely impact it would have on the broader Chinese economy, and whether it would create financing problems and lower consumer spending.
These issues brought slowing Chinese growth back into focus with analysts looking at what the rebalancing of China’s economy would mean for base metals. Mid-July, BNP Paribas, announced it had cut its base metal price forecasts for the second half of 2015 and 2016, noting the deceleration in global demand growth in 2015 and 2016 would be driven by China. Likewise, Macquarie called for supply cutbacks to prevent growing oversupply as a result of a slower China, while brokerage Sucden Financial noted the slowdown in growth in China’s fixed asset investment and industrial production.
However, perhaps one of the most significant developments for copper over July was Goldman Sachs revising its three-, six- and 12-month copper forecasts lower to $5,200/mt, $4,800/mt and $4,800/mt from $5,500/mt, $5,500/mt and $5,200/mt respectively. The US investment bank also said it was targeting $4,500/mt by the end of 2016 — 20% below current spot prices and more than 30% below consensus. Goldman was even more bearish longer-term, revising its 2017 and 2018 copper price forecasts to $4,500/mt, down from $7,000/mt and $8,000/mt respectively.
The bank also announced that its new China Metals Consumption Index indicates metals and mining demand growth has been slowing far more sharply than industrial production and fixed asset investment growth had previously suggested. According to the index, Chinese metal demand contracted during the second quarter on a year-on-year basis by the most since the 2008-2009 financial crisis. Although the Goldman Sachs noted there was likely to be some improvement in the coming months on the back of recent policy easing, this is unlikely to balance metals markets due to the fact that supply continued to outpace demand during the first quarter of the year.
The weaker global macro picture was also underlined by the International Monetary Fund’s (IMF) announcement that it had trimmed its global growth forecast to 3.3% (0.2% below what it forecast in April) mostly on account of weakness in the US in the first quarter. However, the IMF expects growth of 3.8% in 2016.
July PMI manufacturing data from key regions was less supportive for base metals than the previous month, indicating a marginally weaker outlook for the global manufacturing sector. China’s official manufacturing PMI came in lower at 50 from 50.2 in June, while the Caixin Markit manufacturing PMI came in substantially lower at 47.8 down from 49.4 in June — a two-year low. Markit said the July data indicated the downturn in China’s manufacturing sector intensified at the start of the third quarter, with renewed falls in both total new work and new export orders requiring manufacturers to cut production at the fastest rate since November 2011.
The eurozone PMI was also down slightly at 52.4 in July from 52.5 in June (its highest reading since it registered 53.4 in April 2014). Likewise, the US manufacturing ISM in July was down at 52.7 from a six-month high of 53.5 in June. Our weighted global PMI of these key regions ticked slightly lower at 50.8 in July from 51.1 in June.
LME position data
LME position data released for July 31 was also broadly less supportive for base metals. Money manager positions were mixed at the end of the month, with some metals starting to look mildly bullish while others remained bearish. Copper saw the net short position that appeared earlier in July increase to 5,249 lots by July 31.
However, while short positions were up 11,377 lots from July 24, long positions for copper were also up by 7,487 lots over the same period — the first time copper longs increased in July. This could be an indication that the copper price is now trading near the bottom with both shorts and longs competing for dominance. However, any real price uptrend will have to be driven by more follow-through buying.
Elsewhere, net length for aluminum fell 2,531 lots July 31 to 46,982 lots compared to 49,513 lots July 24. This was driven by an increase in both the long and the short money manager positions, with the shorts increasing in percentage terms more than the longs. Net length for nickel was down 4,230 lots at 7,273 lots July 31 from a net length money manager position of 11,503 lots July 24.
The money manager position for tin was bullish, with net length at 2,765 lots, up from 1,943 lots July 24, with longs up by 1,093 lots at 5,092 lots over the same period.
In July, attention also remained on whether the US Federal Open Market Committee will hint further at the date it will raise interest rates. Federal Reserve chairwoman Janet Yellen had already suggested the Fed will increase rates at some point this year, with economists expecting the most likely date will be September, while others see December more likely. Last week’s policy statement seemed to reinforce September as the date, with the Fed upgrading its view of the US economy but questioning the rate of inflation.
Overall, July was another bearish month for base metals with the Greek debt drama, China’s equity crash and the potential US rate hike all weighing on investor sentiment. Added to these concerns was the likely impact of slower Chinese growth on the supply and demand outlook with analysts downgrading their long-term and short-term forecasts.
Weaker PMI data also failed to provide a clear direction for metals, and without a meaningful reduction in supply, it remains to be seen whether prices will trend higher over August.
For now it appears all eyes are on China as demand expectations continue to weaken and the country’s equity markets continue to look volatile.