Renewed European Debt Crisis Weighed Down Base Metals Prices

SHANGHAI, Mar. 20 (SMM) – Nonferrous metals prices staged a sharp rise in early 2013, buoyed by ample liquidity, expectations for imminent seasonally high-demand period and restocking ahead of the Chinese New Year. Base metals prices, however, fell back following the Chinese New Year, with copper and zinc prices crashing through support levels and LME nickel retreating from USD 17,000/mt. Cyprus decided last Saturday to impose one-off tax on the country’s bank depositors, sending nonferrous metals prices plunging.      

European Debt Crisis Resurfaced
The European debt crisis began to fade in September 2012, but resurfaced following Cyprus’s decision last Saturday to impose one-off tax on the country’s bank depositors.

It was reported overseas that Cyprus’s international creditor have planned to impose 9.9% one-off deposit tax on the country’s bank depositors with savings above 100,000 euro, and 6.75% deposit tax on those with savings below 100,000 euro.

The Eurogroup advised to reduce deposit tax burdens for depositors with smaller savings, but insist on levying a total of 5.8 billion euro of deposit tax.

As a result, international capital markets slipped into turmoil and commodity prices also plummeted. All base metals on the LME gapped lower on Monday, driving spot prices down as well. Spot lead prices have slid to cost levels, while spot aluminum prices have dropped well below cost levels.
 
US Economy Continues to Grow
Retail sales in the US rose 1.1% MoM in February, the biggest increase since September 2012 and well above expectations. Initial jobless claims in the US fell to 332,000 in the week ended March 9, the lowest level since autumn of 2007.  

A rising US dollar has kept base metals prices in check, but the US economic recovery will boost confidence over a rebound in demand for commodities.

Rebound in Chinese Economy Is Limited
Expectations for a big rebound in the Chinese economy faded in March and monetary policy will gradually tighten.

Power consumption for industrial use across China hit 541.8 billion kwh during the first two months of this year, up 3.9% YoY, but down 0.93% from last year. Power consumption by heavy industries totaled 448 billion kwh, up 2.01% YoY, but down 4.63% from 2012. Falling industrial power consumption suggests China’s economic growth has met resistance.

Industrial value added at above-scale industrial enterprises grew 9.9% YoY during January-February this year, but fell 0.4 percentage point from December 2012, causing expectations for a big rebound in Chinese economy to fade. 

Besides, China’s CPI rose more than 3% YoY in February, highlighting growing inflationary pressure. Domestic monetary policy will tighten as a result.

Growth in base metals demand fell short of expectations, depriving base metals prices of any upward momentum.

Base Metals Inventories Continue to Grow
Seasonally high-demand period for copper and aluminum is approaching, but inventories are mounting, a sign of sluggish metals consumption.

According SHFE’s data on March 15, copper and aluminum inventories rose to a 10-year high, while lead inventories also hit a new record high. Inventories of refined copper, aluminum and lead were 231,900 mt, 502,600 mt and 139,700 mt, respectively. 

SMM’s survey found that operating rates at copper downstream producers will rebound in March, but will be lower than in early 2013. Aluminum processors are reporting an increase in orders, but overall order volumes remain thin. 

Housing prices bounced back in most of China’s 70 medium and large cities in February, raising expectations for a growth in metals consumption. However, it remains to be seen whether such growth will materialize. Base metals prices should be weak for the immediate term. If downstream producers receive more orders than expected, base metals prices may go up. Should no favorable policies emerge, base metals prices will have little upward momentum.