Barclays: Base metal prices soften on US Fed, Euro worries

Base metal prices were softer across the base complex on Tuesday and have continued to soften this morning, as concerns over the eurozone crisis and a lack of action by the US Fed weighed on sentiment, said Barclays Capital in a briefing.

On the SHFE, Aluminium prices continue to outperform the LME where they are under pressure from short selling. This has resulted in the SHFE/LME spread widening (net VAT) to levels last seen in mid-2009. Reuters has reported this morning that there has been a pick up in import arbitrage. SHFE aluminium time spreads have also tightened with both front-end and six-month forward spreads moving into backwardation. This is in spite of softer demand which leads us to believe that supply reductions are bringing balance back to the market.

There was a strong rebound in Chinese motorcycle sales and production in November, with output rising by over 5% m/m and over 20% y/y which marks a turnaround from earlier weakness. Auto sales and production also rebounded in November, with output rising 8% m/m, though down 3% y/y.

Meanwhile in copper, workers at Freeport McMoRan’s 510Ktpy Grasberg Copper mine in Indonesia are to return to work on Saturday following a three-month strike. Workers have secured a 37% pay increase over two years.

“We estimate that over 100Kt of production has been lost and concentrate shipments are unlikely to restart immediately due to repair work needed to a critical concentrate pipeline, which Freeport has previously said could take up to six weeks to fix. It is not clear whether works had begun before the strike ended,” Barclays added.

In terms of metals news, Marubeni, the Japanese Aluminium producer, published their forecasts for the aluminium market for 2012 and 2013. These showed the market balance in a 650Kt surplus in 2012 and then a 357Kt deficit in 2013, after a 741Kt surplus this year.

Critical to this tightening effect in their view is the growing deficit in the Chinese market, from just 10Kt this year, to 50Kt in 2012 and then 500Kt next year. In their view, “a rapid expansion of smelter capacity in China, the Middle East and India will cause a supply glut in 2012...but Electricity and other issues will restrain capacity expansion in China, helping to tighten the market.”

The company forecasts aluminium prices to average $2,800/t by 2013, hence anticipating prices to trend higher next year versus current levels close to $2,000/t.

In terms of Europe, Italy's non-ferrous metals association (Assomet) offered a relatively bleak analysis of production trends in 2012. Assomet stated that output of Copper and alloy semi-finished products is expected to drop 5.4% y/y to 1.1Mt this year and to then contract by another 2% y/y in 2012. Aluminium production was seen in more constructive terms however, with output of aluminium and alloy semi-finished products seen rising by 0.4% y/y in 2011 and then being flat next year.