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At the beginning of the week, the World Bank announced that it had cut its Chinese growth forecast to 7.7% from the 8.2% projection made in May, as well as stressing the potential risks of a more pronounced slowdown t..

13 Oct 2012

Commodity Online
The past week has seen a broad move lower across the base metals complex. The most significant weakness has been in aluminium, nickel and zinc, with prices falling as much as 6-8% from their recent highs. The trigger for this pullback was a resurgence in macro pessimism, particularly focussed on the growth outlook for China; Barclays said in a report.

At the beginning of the week, the World Bank announced that it had cut its Chinese growth forecast to 7.7% from the 8.2% projection made in May, as well as stressing the potential risks of a more pronounced slowdown than currently expected. Adjoined by downward revisions to the IMF’s global growth forecasts for 2012 and 2013, as well as a downgrade to Spain’s credit rating, the overall tone of macro sentiment has certainly darkened from the optimism that bouyed performance in September.

In addition, there has been little in the way of significant positive incremental changes in underlying base metal physical market conditions in China to suggest that this pessimism is misplaced. Spot demand conditions in general remain soft in early October, with the majority of supply chain activity limited to hand-to-mouth purchases.

Moreover, raw material inventories in China have, in the majority of cases, either stagnated or trended higher over the past few weeks. Visible primary aluminium stocks in China have reportedly risen to 1Mt, double the levels at the beginning of the year and the highest since July 2010.

Chinese refined lead stocks have also started to rise, albeit from low levels, after a near 14-month period of sequential draws. Perhaps the main positive to come from recent China observations is the degree of destocking in endproducts.

This is particularly evident in the air conditioning sector where recent data have shown product inventories being reduced to the lowest level in three years. As and when end-demand conditions stabilise and, in turn, improve, the degree to which supply chain destocking has taken place in mid-2012 should mean raw material markets benefit relatively quickly. Overall, such indications point to at best a neutral near-term view on base metals performance prospects, with metals such as aluminium offering a case for further downside from current levels.

In terms of other metals news, in the copper market, the most significant data release came in the form of the International Copper Study Group’s (ICSG) new forecast for fundamentals. The ICSG forecast a 426Kt deficit for 2012, followed by a 458Kt surplus for 2013. The reversal in overall market balance is cited by the ICSG as primarily a product of the impact of increased output from new and existing mines.

Mine production is forecast to rise to 17.5Mt (+6.4% y/y) in 2013, versus 3% y/y growth anticipated this year and the general stagnation over the previous three years. Such expectations for supply performance in the concentrate market are affecting annual negotiations for next year.

Negotiations over 2013 annual copper treatment and refining charge (TC/RC) contracts have seen smelters push for a significant improvement on terms versus last year. 2012 saw annual TC/RC’s set at close to $60 per tonne/6 cents per pound, but given spot terms are just above this level currently and supply is anticipated to improve, smelter may be looking for annual terms as high as $80 per tonne/8 cents per pound. In terms of actual agreements, Rio Tinto announced that 75% of Oyu Tolgoi’s concentrate production for 2013 has been sold forward.

This mine had been expected to produce as much as 120Kt in 2013, although this looks optimistic now that there have been delays in negotiating a power supply agreement with Chinese providers. Finally, in terms of copper, Aurubis, the German copper producer, has announced it will keep copper premiums at $86/t for their European customers, which follows a $4/t reduction in May this year. The company sees little reason based on how European market dynamics have evolved from May to October for changing the premium levels for 2013. In terms of other metals, the aluminium market saw the release of Alcoa’s Q3 results.

The company offered no new primary production curtailments, despite a loss in that division, although they did downgrade their 2012 global demand forecasts to 6% growth, versus 7% previously citing the effect of the slowdown in China on H2 consumption performance. This 6% demand growth figure follows 13% in 2010 and 10% in 2011 according to Alcoa.

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