China Metal Special Report Update- Impact of the coronavirus (COVID-19) outbreak on China nonferrous metals market

SHANGHAI, Feb 18 (SMM) – Transportation activity in coastal provinces has started to return to near normal levels in recent days, but that inland remains more restricted. Overall economic activity remains muted due to the 14-day self-quarantine rules in most cities which are limiting the ability of factories and construction to restart. However, in most areas this activity is expected to resume in coming weeks and overall confidence in future demand remains solid, especially with the government sending out supportive messages towards economic support.

It remains too early to say whether there is any significant aggregate demand loss, but clearly inventory is rising for most metals, especially at producers. However, inventory always rises post CNY ahead of demand going into its strong season, and hence so far few market players are interpreting the inventory build as bearish.

Please see below for more details on the impact to each metal, and don’t forget to join our webinar on the latest impact from the virus, and a deep dive into the ferrous metals market (steel and iron ore), tomorrow ( February 19) at 5PM China time. Book your slots by following this link https://register.gotowebinar.com/register/1659228322246787596

Copper

The recent coronavirus (COVID-19) epidemic has caused a heavy impact on demand and supply of copper, leading to a sharp increase in inventories in China. Downstream processors delayed their resumption of operations due to logistical constraints, delayed return of workers and the absence of approval from authorities. Smelters, meanwhile, maintained production since the Chinese New Year holiday, even as transportation restrictions led to a shortage of storage capacity for sulphuric acid and heightened risks of excessive inventory of finished goods, which would subdue production.

SMM data showed that social inventories of copper across Shanghai, Jiangsu and Guangdong stood at 403,000 mt as of February 14, up 188,000mt from January 23, the last trading day before the CNY holiday. The inventories are likely to continue to trend higher in February and exceed 500,000 mt. Meanwhile, copper stocks across bonded warehouses increased 27,800 mt, and are expected to see a larger gain following the recovery of operations of warehouses.

Smelters also saw an inventory accumulation of copper cathode. An SMM survey showed that copper cathode inventories across Chinese copper smelters increased about 50,000 mt from a month earlier to a record high of 77,300 mt as of early February, which put smelters under great pressure in terms of storage capacity and cash flows.

Inventories of copper cathode and finished goods at copper processors have barely changed, as their resumption of operations was delayed. Processors are likely to see raw material stocks decreasing while finished goods stocks increasing upon resumption amid lingering logistical constraints.

Aluminium

Social inventories of primary aluminium ingots in China are expected to reach a peak of 1.5 million mt, as downstream consumption slowly recovers and deliveries continue to arrive. SMM data showed that inventories were 1.16 million mt as of February 17, up 472,000 mt from January 23. Most of social warehouses saw only inflows during the CNY holiday and two weeks after CNY, as delayed resumption of downstream consumers in most part of China, road transport restrictions and suspension of outbound business at some of the warehouses muted outflows from social warehouses. 

Deliveries of aluminium ingots to social warehouses are likely to expand, growing inventory pressure, as smelters have stepped up production of ingots after delayed resumption of aluminium billet and rod producers reduced consumption of molten aluminium. Output of aluminium ingots was higher than the same period last year, which has lifted ingot inventories at smelters amid road transport restrictions.

Currently inventories of finished goods at aluminium processors remain at high levels, as logistics issues forced plants to delay the delivery of most of the orders. Their clients have slowed down on cargo orders, as end-users have yet to recover operations. Finished goods inventories at aluminium processors in March are likely to decline from February, as plants will rush to deplete their stocks to fulfill backlogged orders and ease cash flow pressure in late February and early March, following the gradual recovery of businesses across the industry and easing of logistical constraints.

Zinc

Inventories of zinc concentrate across domestic smelters decreased 10.1 days on the month and 18.1 days on the year to 20.19 days of production at end January as logistics controls slowed restocking more significantly compared to raw material consumption. 

The COVID-19 epidemic has heavily affected the automobile industry between late January and early February, while rail transportation had little impact. Shipments by Guosen Mining were only to a Chihong Zn & Ge smelter in Hulun Buir, Inner Mongolia. Smelters worked through raw material inventories during CNY holiday which averaged 28-30 days of production. Smelters are likely to cut output in February due to raw material issues.

Production restarts vary across regions amid the ongoing epidemic. Logistics regulations are likely to remain in place, and smelters are likely to cut production due to raw material shortages. Recoveries in logistics are expected to improve raw material issues at smelters.

Inventories of zinc concentrate at Lianyungang port stood at 165,000 mt as of February 7, up 15,000 mt on the month. This excludes zinc concentrate stranded at ports due to logistics issues caused by the COVID-19 outbreak. Smelters are in great need for seaborne cargoes due to low raw material inventories and shutdowns at some of mines in Inner Mongolia. Shipments to and from Lianyungang port are expected to increase tangibly after logistics return to normal, leaving total port inventories unchanged. 

As of February 17, inventories of zinc concentrate at Lianyungang port increased to 190,000 mt due to more arriving shipments driven by import profits and fewer shipments from the port. On the other hand, demand for seaborne cargoes from domestic smelters picked up amid high zinc output, continued production during CNY holiday and halts at some of mines in winter.

As of February 7, finished product inventories at domestic zinc smelters rose 78,400 mt from December to 106,800 mt. Downstream sectors suspended operations for CNY around January 20, while smelters maintained high operating rates. In February, downstream sectors delayed resumption to the second half of the month due to the COVID-19 epidemic, and transport restrictions prevented smelter stocks from transferring to social warehouses. Stock saturation of sulphuric acid and finished products is likely to prompt smelters to reduce operating rates, and smelter stocks will be transferred to social warehouses after logistics gradually recovers.

Lead

Treatment charges for lead concentrate across China stayed at highs in February, and are expected to continue the uptrend. As of February 10, TCs were assessed at 2,300-2,500 yuan/mt in Henan, 2,100-2,200 yuan/mt in Hunan, Yunnan and Guangxi, 2,400-2,600 yuan/mt in Inner Mongolia. All prices were in Pb content. A separate survey by SMM showed that lead concentrate inventories at Chinese smelters averaged 47.6 days in January, down 2.8 days from the previous month, which was still a relatively high level. Lead concentrate demand and supply varied from north China to the south. High raw material inventories kept northern smelters from replenishing their stocks ahead of the CNY holiday, while logistical constraints deterred them from restocking after the holiday. Those smelters have to continue to deplete their existing raw material inventories, leading to an inventory decline. Raw material inventories at Chinese lead smelters are expected to fall further in February, as logistics have yet to recover when it comes to later in the month.

As of February 7, inventories of lead concentrate at port of Lianyungang came in at 25,000 mt, down 15,000 mt from a month earlier, according to SMM data. Mainstream quotes for TCs for imported lead concentrated climbed to $160-180/dmt in January, which were more enticing than domestic materials. Some smelters turned to buy imported lead concentrate, and Lianyungang saw more lead concentrate leave in the middle of January. Deliveries to Lianyungang held stable ahead of the CNY holiday, as cargoes under long-term contracts arrived. Flows into the port of Lianyungang, however, have been disrupted since the CNY holiday due to the epidemic. This, coupled with steady outflows, triggered lead concentrate inventories at Lianyungang to continue trending lower. There were plenty of cargoes stranded at the port of Lianyungang as of mid-February, according to the latest SMM survey, which increase the chances of inventory rebound after port congestion eases.

Lead ingots across Chinese smelters climbed to 91,100 mt as of February 7, up 78,800 mt from a month ago, showed SMM data. Lead prices strengthened ahead of the CNY holiday, which encouraged smelters to maintain production till late before the holiday. In-plant lead ingot inventories began to rise ahead of the holiday, and continued to expand over the holiday, as the virus containment measures constrained road transport capacity. Finished goods inventory levels were healthy at smelters who delivered cargoes by rail, while smelters preferring truck transportation, saw their finished goods inventory growing significantly. In-plant lead stocks continued to grow after the holiday, due to travel and transportation restrictions and as downstream consumers delayed their resumption of production.

Nickel and Stainless steel

The recovery of logistics will be key to affect the resumption of downstream demand this week. Current sufficient supplies of spot cargoes are likely to see offers of Russian nickel at discounts of 100 yuan/mt to premiums of 100 yuan/mt over the SHFE 2003 nickel contract, and quotes of Jinchuan nickel at premiums of 500-1,000 yuan/mt this week. Jinchuan smelter planned to cut its refined nickel production in February on the back of inventory pressure of sulphuric acid. This is expected to affect nickel shipments from the company this week.

An SMM survey found that nickel stocks in Shanghai (including SHFE warrants) rose 3,589 mt or 4.6% from pre-holiday (January 23) to 81,000 mt as of February 14. Domestic stocks (excluding bonded warehouses) stood at 62,000 mt, with nickel briquette of 5,000 mt and nickel cathode of 57,000 mt. Cargoes arrived during the Chinese New Year holiday have already been registered. Social inventories rose by about 3,500 mt as large amounts of nickel cathode from smelters in Gansu and Xinjiang arrived in Shanghai and surrounding warehouses.

Stocks of refined nickel in the Shanghai bonded zone stood at 19,000 mt as of February 14, up 500 mt on the week, with a slight increase in nickel cathode. Some cargoes of nickel briquette entered the domestic market. Cargoes that arrived at ports could not be put into storage at the bonded warehouses due to a shortage of road vehicles, and delivery may be postponed until this week.

Social inventories of stainless steel in Wuxi and Foshan increased 1.26% from mid-January to 640,000 mt as of end-January, showed SMM data. Among this, stocks of #200 stainless steel lost 22% to stand at 164,000 mt, while inventories of #300 series added 3% to 368,000 mt, and stocks of #400 series increased 1% to 64,000 mt.

Transport restrictions deterred stainless steel mills from transferring cargoes to social warehouses, which bolstered in-plant stocks, and this, combined with the suspension of downstream sectors, is likely to weigh on steel prices.

Some stainless steel sellers and traders in Wuxi began to offer online, but inquiries were rare as downstream sectors mostly remained closed. Some large-scale stainless steel mills (MSSC and Wuxi Puxin Stainless Steel) already resumed operations, while the Oriental Steel City and the southern stainless steel market remained under strict inspections and the resumption date was undetermined.

SMM expects stainless steel prices to weaken in the short term with inventories piling up. The scheduled stainless steel production for March may resume to normal levels if the recovery of demand will be able to halt the increase in inventories by end February.