Weak Demand Fails to Support Metals Prices despite Production Resumption

SHANGHAI, Feb. 28 (SMM) – Mines and downstream processing enterprises resumed normal production after the Lantern Festival. Whether the recovery of production at downstream enterprises will give a boost to base metals market?

The US dollar index climbed and global commodity prices slumped as the Fed hinted earlier termination of easing policies, with LME copper prices down 4.8% last week, the biggest weekly loss since December 2011.

Macroeconomic Conditions
Global economic recovery, the euro zone economy in particular, was slower than expected. Besides, the Italian election and automatic spending cuts which should come in effect on March 1 both added to risk aversion in the market. The tighter property market control in China also hurt market confidence, depressing demand for nonferrous metals.

With no positive new reported, commodity prices are expected to fluctuate down in the short term, but the possibility of rebound should not be ruled out. In general, base metals should be mainly affected by the US automatic spending cuts, the Italian election, and China’s NPC and CPPCC sessions. 
 
Market Fundamentals 
As some downstream enterprises did not restart production immediately after the holiday, purchases remained limited. Production should return normal after the Lantern Festival, but downstream producers may still mainly consume existing inventories. Thus, demand will unlikely fully recover until March.

Data show that SHFE copper inventories increased 11,010 mt to 207,709 mt and copper prices slumped due mainly to the climbing inventories and weak downstream demand. High-demand season for copper traditionally fall in March and April, with replenishments expected, which will give certain support to copper prices. Aluminum inventories also kept rising, with stocks in Shanghai, Wuxi, Nanhai, and Guangdong hitting 1.12 million mt as of February 18, a record high, while aluminum consumption is not expected to recover until March.

SMM believes downstream demand will not be able to give any support to base metals prices before March.

SMM View
Given the uncertainties to current economic conditions, metals market should keep fluctuating in the short term as demand will remain weak, and prices should stage noticeable change in March.